Recourse is a type of financial obligation in which a borrower is legally obligated to repay the debt to the lender and may have to provide collateral or assets to secure the debt. It is a legal right of the lender to reclaim assets if the debt is not paid back. In order for a lender to have recourse over an asset, it must be catalogued in the loan documents, so that if the borrower does not repay their loan the lender knows precisely which assets are the security.

Full recourse is the most common form of recourse debt, which allows the lender to reclaim a wide range of assets, in addition to the security pledged, in order to repay the loan if the borrower defaults. The borrower’s bank accounts, wages, and other possessions may be levied in this case.

Non-recourse debt, however, means that the lender only has the right to reclaim the particular asset pledged as security, and nothing more. This form of debt is beneficial to the borrower, as they are protected against the loss of other assets in the event of default.

There are also two tax implications associated with recourse debt: first, when the property is foreclosed, the borrowers are liable to pay taxes on the difference between their debt balance and the loan’s fair market value. Secondly, reporting a gain or loss from a foreclosure also needs to occur, depending on whether the foreclosure proceeds surpass or fail to meet the principal balance.

Overall, understanding the legal implications of recourse debt and being familiar with the consequences of default are important for any borrower who is considering entering into a loan agreement. Although non-recourse loans are ideal for the borrower, in many cases lenders prefer to enter into recourse loans which provide the lender with greater levels of protection against default risk. It is important for the borrower to be aware of the different outcomes resulting from default, as well as the associated risks, prior to signing any loan documents.