Non-recourse is a legal term used to describe the power granted to lenders to recover their investment when borrowers fail to make payments. The laws regulating loans, whether these are credit cards or mortgages, vary from state to state and it is in the interest of consumers to know their rights when it comes to borrowing. In some states non-recourse laws allow borrowers to walk away from credit card loans without having to repay them.
Recourse vs. Non-recourse
If you have a recourse credit card debt, it means your lender can hold you personally accountable for repaying the full amount of the loan. On the other hand, if you have a non-recourse credit card loan, you are not personally liable for the loan. This means that if you cannot repay the credit card debt, the only thing a lender can do is take possession of the collateral you attached to the credit card loan.
Credit Card and Collateral
Collateral is a term more often used in mortgages than in credit cards. It refers to money or property that is provided as security in case a borrower does not repay his debts. For instance, a mortgage loan uses the property as collateral. Consumers with a good credit history do not need collateral to qualify for a credit card. However, borrowers with a bad credit history, or no credit history, may have to provide collateral to a credit card lender, such as a security deposit, jewelery or a car, if they want lenders to approve their credit card application.
Non-recourse Credit Cards and Statute of Limitations
A recourse credit card may become a non-recourse credit card if your lender exceeds the statute of limitations for creditors in your state to collect the money owed. A statute of limitations is a period after which certain rights or responsibilities no longer apply. If you stop making payments on your credit card and your lender takes longer than the window of time time allowed in your state to sue you, you have the right to get the suit dismissed on the grounds that the debt is time-barred. The statute of limitations on credit cards varies from state to state ranging from three to 10 years.
Non-recourse Debt and Taxes
In certain cases a lender may forgive or cancel all or some of the credit card debt of a borrower. The tax ramifications of this debt cancellation depend on whether the loan was a recourse or a non-recourse loan. The Internal Revenue Service considers debt canceled or forgiven from a recourse loan as taxable income, and you must pay taxes on it. However, canceled debt from a non-recourse credit card loan is not considered income and is therefore not taxable.
- Federal Housing Finance Agency: Recourse and Residential Mortgage Default
- Internal Revenue Service: Recourse vs. Nonrecourse Debt
- Bankrate: Build Credit With a Secured Credit Card
- MSN Money Central: Is There a Statute of Limitations on Debt?
- Internal Revenue Service. "IRS Courseware: Recourse vs. Nonrecourse Debt." Accessed Mar. 10, 2020.
Andrew Latham has worked as a professional copywriter since 2005 and is the owner of LanguageVox, a Spanish and English language services provider. His work has been published in "Property News" and on the San Francisco Chronicle's website, SFGate. Latham holds a Bachelor of Science in English and a diploma in linguistics from Open University.