Assignment of debts: Overview, definition, and example
What is assignment of debts?
Assignment of debts refers to the process in which a creditor (the party to whom money is owed) transfers the right to collect a debt to another party, known as the assignee. The assignee takes on the responsibility of collecting the debt from the debtor, typically in exchange for a fee or payment. The debtor is usually notified of the assignment, but in some cases, they may not need to provide consent. Once the debt is assigned, the assignee becomes the new party entitled to the debt repayment.
For example, a bank may assign the right to collect a loan to a collections agency, which then becomes responsible for collecting the outstanding debt from the borrower.
Why is assignment of debts important?
Assignment of debts is important because it allows creditors to transfer the rights to collect debts when they either want to free themselves from the obligation or when they need immediate cash flow. It also provides a mechanism for businesses to outsource debt collection to specialized agencies, such as collections firms or financial institutions.
For businesses, assigning debts can help in managing cash flow, reducing administrative burden, or recovering part of the outstanding amount by selling the debt to another party. For assignees, it offers an opportunity to profit by collecting debts from the debtor.
Understanding assignment of debts through an example
Imagine a business that has provided goods to a customer on credit, and the customer has not paid the bill on time. The business might assign the debt to a collections agency, which then takes over the responsibility of collecting the amount owed. The collections agency may either negotiate a repayment plan or purchase the debt at a discounted rate to recover the amount.
In another example, a company with outstanding loans might sell its loan agreements to a bank. The bank then becomes the assignee and has the right to collect payments from the borrowers. The company may receive immediate cash from the bank, which can be used for other business operations.
An example of an assignment of debts clause
Here’s how an assignment of debts clause might look in a contract:
“The Creditor may, at any time and without the Debtor's consent, assign its rights to collect any outstanding debt under this Agreement to a third party (the Assignee), and the Assignee shall have the right to collect all amounts due and owing from the Debtor.”
Conclusion
Assignment of debts is a useful financial tool that allows creditors to transfer the right to collect a debt to another party. It can help businesses manage cash flow and reduce the risk of non-payment, while also providing opportunities for assignees to collect debts at a discounted rate. For businesses, understanding how to structure an assignment of debts and including clear clauses in contracts ensures that the process is handled legally and efficiently.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.