The Difference Between "Recourse" and "Non-Recourse" Loans

When borrowing money, the loan may be either recourse or non-recourse. In both cases, if the borrower doesn't repay the loan, the lender can seize the collateral (i.e. the asset that secures the loan, which is usually the asset that was purchased with the money from the loan). What if the collateral is not enough to fully repay the lender? This is where the distinction between recourse and non-recourse becomes important.

A recourse loan holds the borrower personally liable. If the collateral is not enough to fully repay the lender, the lender can also go after other personal assets of the borrower. For example, if the borrower defaults on a recourse mortgage, the lender can seize and sell the collateral (i.e. the house), and the lender can also go after the borrower's other assets or sue to have the borrower's wages garnished until the lender collects the entire amount owed.

A non-recourse loan does not allow the lender to pursue anything other than the collateral. So if the borrower defaults on a non-recourse mortgage, the lender can only seize and sell the house. If the house does not sell for at least the amount the borrower owes, the lender is out of luck. The lender cannot take any further legal action to collect the money owed.

Can taxes be discharged in bankruptcy?

It is possible to discharge certain tax debts in bankruptcy, provided that certain requirements are met:

● The taxes must be income taxes. Other types of taxes, such as payroll taxes, cannot be discharged.

● More than three years must have elapsed since the tax return generating the liability was due. In other words, the tax return must have been originally due at least three years before the taxpayer filed for bankruptcy.

● The tax returns must have been filed more than two years earlier than the bankruptcy petition. So, even if the tax return was filed late, the tax can still be discharged as long as the tax return was filed at least two years before filing the bankruptcy.

● More than 240 days have elapsed since the tax was assessed. The assessment date is typically on or near the date the income tax return was filed.

● The taxpayer did not commit fraud. A taxpayer who willfully attempts to evade paying taxes will not receive a discharge. This means an intentional, deliberate attempt to evade taxes (not an honest mistake).

● The IRS did not file a substitute return. If you did not file a tax return on time and the IRS filed a substitute tax return on your behalf, the taxes will not be discharged, even if you file a tax return later. The penalties and interest will be discharged provided that the other requirements above are met, but the tax debt will remain.

HOW LONG DOES DEROGATORY INFORMATION STAY ON YOUR CREDIT REPORT?

● Most derogatory (negative) information stays on your credit report for seven years. This includes late payments, unpaid debts, foreclosures, defaulted student loans, and judgments against you.

● Chapter 7 bankruptcies can stay on your credit report for 10 years. Chapter 13 bankruptcies are deleted after seven years since it required at least a partial repayment of the debts.

● An inquiry (i.e. a record of a potential lender checking your credit in response to your loan/credit application) stays on your report for two years. Too many inquiries can be seen as a negative.

● Unpaid tax liens can remain on your credit report indefinitely, although they are typically removed after 15 years. Once it is paid, it must be removed seven years from the date it was filed.