Legal Question in Real Estate Law in California

Re: Non Recourse Loans - Walk Away Pitfalls

It will affect their credit. It means that there is no obligation to pay any deficiency in the debts remaining after the asset securing the obligation is sold. They may also have income tax liability to the extent they receive $$ they do not have to repay.

Re: Non Recourse Loans - Walk Away Pitfalls

A non-recourse loan is a loan for which the lender�s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in "cancellation of debt" income. However, it may result in other tax consequences, as discussed in Question 3 below.

The foreclosure will still show up on the borrowers' credit rating. Your clients should also ask their CPA if they might have a tax gain. The foreclosure sale price might exceed what they paid for the property.

If they other debt problems, they might want to consult a bankruptcy. They should also seek legal counsel to determine if it really is a non-recourse loan.

Re: Non Recourse Loans - Walk Away Pitfalls

I too am concerned about the conclusion that the loans are truly non-recourse. Are they specifically made non-recourse by the black-and-white terms contained within the four corners of the note or other obligation, or is the borrower being advised they are non-recourse in reliance on some law, such as the antideficiency statutes?

Also, determining whether a loan is nonrecourse or not is not normally within the province of a CPA. Some may know, but I'd respectfully point out that not even our Courts of Appeal are in agreement on whether loans with certain characteristics are, or are not, subject to a deficiency judgment.

Also, if the loans are not residential loans, I'm not sure they are rescued from taxation on loan foregiveness "income" by the recent legislation, which I think was for the benefit of defaulting homeowners. Other types of loans may not qualify.

Finally, the clients need to be advised that a lender's remedies are not limited to suit for defaulting on the note's principal and interest, essentially a breach-of-contract kind of claim. The lender might in addition be able to pursue tort-type claims against a borrower. For example, we see an increasing tendency to look for, and sue, on fraud in the loan application, such as overstating income, claiming to be an owner-occupant when the property was really bought for income and resale speculation, and so on. Lenders also sue in tort for deliberate waste or impairment of the collateral value, such as logging off the trees on the property, failing to get a puumber to fix water leaks that are damaging the property, and so on.