Real Estate and Recourse Loans
If You own Real Estate, it’s imperative that You know whether the Loans on the property are Recourse or Non-Recourse.
In the State of California, there is an anti-deficiency statute that makes all “Purchase Money” mortgage loans Non-Recourse loans. If You buy Real Estate for example, and ultimately, You cannot make the payment and have to Foreclose or do a Short Sale, the Bank does not have legal grounds to come after You for the difference between what You owed them and what the Property sold for… This is also called the “Deficiency Balance”. However, when the Bank “forgives” that debt, a taxable event is created. Meaning, You could owe the IRS income tax on the amount of Deficiency Balance forgiven by the Bank. This is incredibly un-fair and totally ridiculous, but it’s True. There are Exclusions and Exemptions that could allow You to avoid this liability under certain circumstances. However, it would be wise to see the advice of a Tax Professional immediately if You are about to do a Short Sale or Foreclose OR You have already experienced either of the two.
A Recourse loan means the Bank has “recourse” and can come after You personally if You don’t satisfy the agreed loan obligation. In the state of California, You have a Recourse Loan only if You have Refinanced Your loan(s) since You purchased the property OR obtained a new loan on the Home after the purchase of the property. If Your loan(s) have recourse, in the event of default, the Bank can sue You, get a judgment against You and garnish Your wages until the debt is repaid. This is obviously not something I want to see happen to anyone, but it happens every day. In many cases, seeking a Free Consultation with a Bankruptcy Lawyer will make sense as this is a full-proof remedy for a Creditor that is pursuing You for a deficiency balance on a loan obligation. However, if they forgive the debt 1 minute before You file a Bankruptcy, You could potentially owe the IRS and the Bankruptcy becomes less powerful.