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Debts are increasingly common in today’s financial climate, and unfortunately, many people struggle to repay what they owe. Debts owed can be sold to third parties and a lot of companies in the UK purchase debts. However, this can be complicated as specific legal formalities apply when assigning debts. This article will explain some of the critical issues around the assignment of debt.
When Could an Assignment of Debt Happen?
Debt collection can be a complex process. There are various reasons as to why debt is assigned. For example, a company owed debt may want to avoid putting in time and effort to chase it or want to take legal action to recover it.
To picture a scenario, imagine this:
- Joe Bloggs gets a brand-new shiny credit card. Joe purchases lots of nice things for his family with the credit card. Usually, he can keep up with payments as he keeps track of them and earns enough to pay them back;
- suddenly, Joe has an injury and cannot work anymore. He has to give up his job and now can’t afford to pay the credit card company back;
- Joe ignores various letters chasing the debt and hopes the problem will disappear. Ultimately, after months, the credit card company gives up and sells Joe’s debt to a debt collection agency.
So, in summary – after the debt sale, Joe now owes money to a different company.
In practice, debt assignments can be complex, and the parties must follow the relevant legal rules and draft the correct documentation.
Key Issues on Assignment of Debt
An assignment of debt essentially transfers the debt from one party (the assignor) to a third party (an assignee).
In practice, this will mean the original debtor (e.g. Joe Bloggs) will now owe the debt to a new third-party creditor (e.g. the debt collection business). Therefore, in the scenario above, Joe must now repay the debt to the third-party debt collection business.
This process can be complex. There have been several legal cases in the courts where this process has given rise to disputes.
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Drafting the Correct Documentation
There are two different types of assignment of debt – a legal assignment of debt and an equitable assignment of debt.
In simple terms:
- a legal assignment of debt will transfer the right for enforcement of the debt; and
- an equitable assignment of debt will transfer only the benefit of the debt without the right to enforce it.
Let us explore each type below.
Legal Assignment of Debt
If the assignment complies with specific legal requirements under the Law of Property Act 1925, it will be a ‘legal assignment’. This means that the assignee will be the new owner of the debt.
A legal assignment requires various formalities to be effective. For example, it must:
- be in writing and signed by the assignor;
- the debtor must be given written notice of the assignment;
- be absolute with no conditions attached to it;
- relate to the whole of the debt and not just part of it; and
- not be a charge.
After the transfer of the debt, the assignor can sue the debtor in its own name.
Equitable Assignment of Debt
It is also possible to have an equitable debt transfer – the requirements for this are much less strict. For example, this can be done informally by the assignor informing the assignee that the rights are transferred to them.
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For an equitable assignment, giving notice is not essential, but still always highly advisable.
Where an equitable assignment is made, the assignee won’t have the right to pursue court action for the debt. In this case, the assignee will have to join forces with the assignor to sue for the debt to sue for the debt.
Giving Notice
The debtor should receive notice of any debt transfer so they know to whom the money is owed. Following notice, the new debt owner can pursue the debt owed.
A legal assignment is the best option for an assignee of debt – this will give them full rights to enforce the debt.
Key Takeaways
Assignments of debts can be very complex. For a legal assignment of debt, you need to follow various formalities. Otherwise, it may be unenforceable and lead to disputes. If you need help executing a debt assignment correctly, you should seek legal advice from an experienced lawyer.
If you need help with an assignment of debt, LegalVision’s experienced business lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 0808 196 8584 or visit our membership page.
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