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LSDefine
Simple English definitions for legal terms
nonrecourse
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A quick definition of nonrecourse:
Nonrecourse: Nonrecourse is a type of debt where the lender can only take the collateral to pay back the loan, and not the borrower's personal assets. This means that if the collateral is not enough to pay back the loan, the lender cannot ask the borrower to pay the difference. To know if a loan is recourse or nonrecourse, we look at the language in the loan agreement. Sometimes it doesn't matter if the loan is recourse or nonrecourse for tax purposes.
A more thorough explanation:
Definition: Nonrecourse is a type of debt where the lender can only use the collateral to pay off the loan, and cannot go after the borrower's personal assets. This is different from a recourse loan, where the lender can go after the borrower's personal assets if the collateral is not enough to pay off the loan.
For example, if someone takes out a nonrecourse loan to buy a car, and they can't make the payments, the lender can only take the car to pay off the loan. They can't go after the borrower's bank account or other assets.
To determine whether a loan is recourse or nonrecourse, courts will look at the language of the loan agreement. If the agreement says that the lender can go after the borrower's personal assets, it's a recourse loan. If it says that the lender can only use the collateral, it's a nonrecourse loan.
It's important to note that whether a loan is recourse or nonrecourse can affect how it's treated for tax purposes. For example, if someone sells a property and the buyer assumes their nonrecourse mortgage, they may still have to pay taxes on the sale. But if the mortgage is a recourse loan, they may not have to pay taxes on the sale.
Example: John takes out a nonrecourse loan to buy a house. He can't make the payments, and the lender forecloses on the house. The lender can only sell the house to pay off the loan. They can't go after John's bank account or other assets.
Example: Sarah takes out a recourse loan to buy a car. She can't make the payments, and the lender repossesses the car. The car is sold, but it doesn't cover the full amount of the loan. The lender can go after Sarah's bank account or other assets to get the rest of the money.
Explanation: These examples illustrate the difference between a nonrecourse loan and a recourse loan. In the first example, the lender can only use the collateral (the house) to pay off the loan. In the second example, the lender can go after the borrower's personal assets if the collateral (the car) is not enough to pay off the loan.