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What is Recourse Law?
Recourse law basically governs the right to demand payment in regard to a check, promissory note or a bill of exchange from endorsers of the document. Recourse claims are often filed in regard to bankruptcies by individuals or businesses that are seeking bankruptcy recourse.
Recourse law can get confusing as it also applies to the selling of notes or pledging of accounts receivable which can provide recourse (or non-recourse or limited recourse) to the purchaser of the notes or the lien holder of accounts receivable.
There are a few ways to hold or to transfer the right to demand payment including the full recourse basis, a non-recourse basis, or limited recourse finance.
If you are selling notes or accepting accounts receivable as collateral for a loan, it is best to consult with an attorney who specializes in recourse law to develop the terms of the transaction.
If you are a consumer, and out of the blue a company that you have never heard is demanding payment from you, you might try checking with the original lender to make sure that the seeking company has a legitimate right to collect on the loan, promissory note or accounts receivable for another company.
It would be sad if you hurt your credit score by refusing to make payment, and even more devastating if you started paying a company that didnít have recourse in regard to the debt.
What is bankruptcy recourse?
Bankruptcy recourse is governed by bankruptcy law in addition to recourse law. Whether the debtor is an individual or a business and their form of business also plays a role in determining whether the creditor has recourse in regard to the debt, in addition to the type of bankruptcy that is filed.
The most common types of bankruptcy include Chapter 7 (which involves liquation), Chapter 11 (which involves reorganization of assets and debt for businesses), Chapter 12 (involving farm owners and reconstruction of their debt), and Chapter 13 (which is a reorganization option for individuals).
In the event of bankruptcy, recourse may be affected resulting in write offs of the creditor and debt cancellation for the debtor. At any rate, it is important that creditors file a recourse claim in order to receive compensation of the debt owed to them in regard to whatever form of bankruptcy is filed.
Some creditors donít think it is necessary to file a recourse claim in the event of a Chapter 7 bankruptcy because more often than not, unsecured debt is dismissed and the creditor is forced to write off the claim giving up the right to recourse that they originally had under recourse law. However, bankruptcy and recourse law allows for collection of debts from assets that are exempt from bankruptcy, so staking your claim may result in at least partial payment as a form of bankruptcy recourse.
What is the difference between recourse debt and non-recourse debt?
As defined in recourse law, the term recourse debt relates to debt that is unsecured or is not backed by collateral that can be repossessed and sold as full or partial collection. It differs from non-recourse debt which is secured by the pledge of collateral that can be repossessed and sold in order to cover the debt. Bankruptcy can change the status of the debt from non-recourse debt to recourse debt in some cases.
In some states, secured debt may be fulfilled even if the collateral does not cover the balance of the loan, while in other states the debtor will still be responsible for the difference in the sale of collateral and the balance of the loan.
Bankruptcy recourse is governed by federal laws; however, recourse laws vary from state to state. If you have a question about recourse or non-recourse debt, bankruptcy recourse, or whether or not to file a recourse claim, it is best to check with an attorney that specializes in bankruptcy law or recourse law in your state.
What is a lenderís protection in a recourse transaction?
While a recourse transaction is unsecured, the lender may have recourse in relation to taking assets of the debtor up to the balance of the debt under recourse law. In such a transaction, collateral is not pledged; however, the lender does have the right to collect the debt in case of a default.
A borrower who defaults on recourse debt can actually be forced into bankruptcy by the creditor. Whether you are the creditor or the debtor in such circumstances, consultation with an attorney is in order. Dealing with recourse law can get sticky without legal representation. The courts will determine what assets can be applied to pay such debts, and what assets are exempt and canít be touched by the creditor. A notice to other creditors is usually provided giving them the opportunity to file a recourse claim against the assets in question whether they possess recourse or non-recourse debt with the borrower.
Recourse law is difficult to understand for most consumers and businesses as well. It is easy to make a mistake as a creditor, and easy to be confused for debtors. Basically, when debt is owed, the creditor has some type of recourse in the collection of money to pay the debt.
Bankruptcy recourse is even harder to understand because many debtors and creditors assume that bankruptcy conquers the owing and collection of debt. In liquidation, this may be true, but there is so much involved in bankruptcy law and recourse law that it is not wise to second guess how the laws apply to you and the present circumstances.
In order to protect your interests, whether you are a creditor or a debtor, the best course of action is to involve a specialist that normally deals with bankruptcy or recourse law. Such attorneys can advise you in regard to what to do, what forms to file, and whether or not the debt is collectible as well as which assets are game for repayment of the debt. They can also provide sound advice concerning whether the debt is recourse or non-recourse debt under recourse laws.