Clients file Bankruptcy for all kinds of reasons. Many times Bankruptcy is the inevitable end result when borrowers experience a negative change in their financial situation.
But there can also be situations where a borrower ends up in Bankruptcy due to surprise. And one of these surprises can result from foreclosure.
With respect to personal liability, California has two general types of homeowner loans—“recourse” and “non-recourse.” When a loan is a “recourse” loan then the borrower can have personal liability if the loan is not fully repaid. When a loan is “non-recourse” then the borrower will generally not have personal liability if the loan isn’t repaid.
Many homeowners don’t know whether their loan is “recourse” or “non-recourse.” If these homeowners default on their loan, then the nature of their loan can be very important. If a loan is “recourse” and the borrower defaults, then the borrower may be exposed to personal liability following foreclosure. If the lender files suit against the borrower following foreclosure, then insolvent borrowers may have little option other than Bankruptcy.
Negotiations with lenders can be greatly influenced by whether a borrower’s loan is “recourse” or “non-recourse.” Some lenders appear to be very willing to make demands on borrowers for repayment even when a loan is “non-recourse.” And the “non-recourse” nature of a loan can be lost or damaged if a borrower doesn’t act prudently. A lender on a “non-recourse” loan is generally limited to the value of the property. Situations can vary, and a borrower’s personal liability isn’t always clear. For these reasons, borrowers should always seek competent, professional legal counsel when trying to determine whether their loan is “recourse” or “non-recourse” or before signing any promissory note in favor of their lender.