Recourse vs. Nonrecourse Debt

The key difference between recourse and nonrecourse debt relates to the lender's ability to pursue the borrower personally if the debt isn't repaid.

Recourse Debt:

A recourse debt holds the borrower personally liable. [1] If the borrower defaults, the lender can pursue the borrower's other assets beyond just the collateral securing the loan. For liability purposes, the entire amount of recourse debts is included when determining insolvency. [1]

Nonrecourse Debt:

A nonrecourse debt does not allow the lender to pursue anything other than the collateral. [1] The taxpayer is not personally liable for repayment. If the taxpayer borrows money and the lender's only recourse is the taxpayer's interest in the activity or the property used in the activity, the loan is a nonrecourse loan. [2]

Tax Implications:

This distinction matters significantly in foreclosure situations and for at-risk rules. In foreclosures involving recourse debt, there can be both cancellation of debt income and gain or loss from the foreclosure. [3] For at-risk purposes, taxpayers generally aren't considered at risk for nonrecourse financing unless it qualifies as qualified nonrecourse financing secured by real property. [2]