Full-recourse debt is secured debt that a borrower is personally liable for repaying. If the borrower fails to pay back the full amount, the lender can seize the collateral guaranteeing the loan. If that’s not enough to cover the loan balance, the lender could also try to collect directly from the borrower using tactics such as wage garnishments or levies.
This article explains what full-recourse debt is, what the alternatives are, and the pros and cons of holding full-recourse debt.
Definition and Examples of Full-Recourse Debt
All debt can be broadly divided into two categories: recourse debt and non-recourse debt. Also known as full-recourse debt, recourse debt means the borrower is personally liable for lender losses resulting from nonpayment. This type of debt is much riskier for borrowers, but much less risky for lenders.
If a borrower defaults on a full-recourse debt, the lender can seize any collateral that guarantees the loan. If that collateral doesn’t cover the remaining loan amount, the lender can also pursue other collections activities, such as garnishing wages. In contrast, non-recourse debt restricts a lender's collection attempts. The lender can take any collateral guaranteeing the loan, but can’t go after a borrower's other property or assets.
Mortgage loans can qualify as either full-recourse or non-recourse debt, depending on the state:
- In some states, deficiency judgements are allowed and mortgages are full-recourse debts. A mortgage lender could foreclose and force the sale of the home. If the sale didn't generate enough money to repay the loan balance and the lender's costs and fees, the lender could try to collect the rest from the borrower. This could mean getting a deficiency judgement and attempting to collect using techniques such as wage garnishment or putting a lien on the borrower’s bank accounts.
- In other states, deficiency judgments are not permitted and mortgages are non-recourse debts. The lender can foreclose and force the home's sale, but if that doesn't repay the loan in full, they can't pursue other collection efforts.
Before borrowing any money, make sure to read the terms of the loan contract so you know if you’re signing up for a full-recourse or non-recourse debt.
How Full-Recourse Debt Works
With a full-recourse debt, lenders have more options for recovering money in cases of nonpayment.
When a borrower defaults, the lender can seize any collateral associated with the unpaid loan, such as a home or a vehicle. If the lender was still left with an unpaid balance, they could pursue further steps to collect money from the borrower.
For example, the lender could go to court and get an order for the borrower to personally pay any remaining loan balance. To enforce this judgement, the court could order that the borrower's wages be garnished, or it could seize the borrower's bank account.
Even in cases of full-recourse debt, there are rules protecting borrowers. For example, federal laws limit the amount of wages that can be garnished during each pay period.
Alternatives to Full-Recourse Debt
Non-recourse debt is an alternative to full-recourse debt. With non-recourse debt, the lender is limited to taking collateral to satisfy the outstanding debt balance. If the collateral's value isn’t enough to cover the amount owed, the lender could face financial loss and would not be able to use other methods to collect the remaining unpaid balance.
Limited-recourse debt is also an alternative. With limited-recourse debt, the lender can seize specific assets named in the loan agreement but can’t pursue any other collections activities.
Advantages and Disadvantages of Full-Recourse Debt
Recourse debt is less risky for lenders because they have more options for recovering unpaid loan balances. As a result, it can sometimes be easier for borrowers to qualify for full-recourse debt or to get lower interest rates.
But full-recourse debt is riskier for borrowers, who could face much more aggressive collections efforts if they default on their loan. Almost all of their property and assets could be at risk.
- Full-recourse debt provides more collection options for lenders.
- If a borrower defaults on full-recourse debt, they can be held personally liable for any remaining balance.
- Lenders can seize collateral for full-recourse debt and also pursue other collection efforts such as wage garnishment.
- Full-recourse debt can be easier to qualify for and have a lower interest rate because it is less risky for lenders.
- Borrowers who take on full-recourse debt put many of their assets at risk.