Can’t manage to enforce your performance? Assignment of debt can help you

JUDr. Ondřej Preuss, Ph.D.
8. October 2024
8 minutes of reading
8 minutes of reading
Other legal issues

In the next article on receivables we will look at what an assignment of receivables means, how accession to debt works or how to prepare an assignment agreement. This information will come in handy if someone has not paid you an invoice or otherwise owes you money, but you would rather leave the collection of your money to someone else.

Claims can be defined as the rights of creditors to the performance of a certain obligation by debtors. This obligation may take the form of financial performance, delivery of goods or services. The more debts someone has, the more difficult it can be for them to manage them, especially if the debtors do not pay and they need to be pursued. This often applies, for example, to large companies and corporations, which then prefer to assign their debts to someone else.

What does assignment of a claim mean?

An assignment of a receivable is sometimes also called an assignment. It is a legal institution through which creditors or assignors can transfer the right to the claim to a third party or assignee. This act transfers all the rights attached to the claim to the assignee. This is most often an assignment for consideration. Receivables are assigned when the creditor does not want to or cannot, for various reasons, collect the receivable himself.

In order not to get lost in the terms at the outset, we will again give you an example. Katherine (creditor, assignor) sells a coat (goods) to Helena (debtor), who does not pay her the invoice for the goods. Thus, Catherine incurs a debt. However, Katerina does not want to deal with its collection and further delays, so she decides to assign this claim to Honza (assignee). Simply put, she sells this claim to him, usually for the same price as the coat or slightly less. She has thus got her money and does not have to deal with the claim any further. Honza owns a debt collection company, so he can deal with the claim more easily. From now on, he has all the rights to the debt, can collect it from Helena, charge her interest on late payments and perform other related actions.

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Do you need to assign your claim?

If you no longer want to waste your time or nerves in recovering your claim and have decided to assign it to a third party, we will be happy to prepare an assignment agreement for you. Thanks to a well-drafted contract, you will be sure that the assignor will actually take over the claim with all its obligations, without any loss to you.

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When is a claim assigned?

Creditors most often decide to assign their claim when they no longer want to or cannot collect the claim themselves for various reasons. This often occurs in two main situations:

Financial distress of the creditor

The creditor needs to get the money owed to them quickly and therefore decides to assign the debt to the assignee. Although the creditor will often buy it back at a lower price than its face value (the amount of the original debt), the funds raised, at least in some amount, are more important to the creditor at the time. This procedure is used, for example, by factoring companies that specialise in debt purchase.

Efficient receivables management

In order to simplify their own processes, large corporations or banks that manage a large number of receivables also use assignment of receivables. If they choose to assign them to a specialist debt recovery entity, they can concentrate on their other activities.

More or less any debt that is legally enforceable can be assigned. However, most often these are claims that arise from commercial transactions or civil relationships, such as the delivery of goods or the provision of services and loans.

There are types of claims that cannot be assigned. These are those of a personal nature, such as claims for maintenance, claims arising out of an employment relationship and the like.

Who’s the assignee?

The assignee is the person or entity to whom the claim is assigned. Often these are so-called factoring companies that buy short-term receivables for a certain commission and then deal with its recovery themselves, but it can also be an individual. The main right and obligation of the assignor is to recover the debt from the debtor according to the terms of the contract between the original creditor and the debtor.

The debtor’s consent is not important

It should also be noted that the assignment of the claim does not affect the debtor itself in any way. He is still legally obliged to fulfil his debt, but not to the original creditor but to the assignor.

At the same time, it is important to know that one of the key aspects of the assignment of the claim is that the debtor does not have to agree to the assignment, it is sufficient that he is informed of it. If the debtor attempts to perform the obligation to the original creditor, the debt will continue to be recorded as unsatisfied until it is paid to the assignee.

Factoring companies are firms that deal with the purchase of short-term receivables. They usually take a commission of 0.8% to 3% of the receivable to cover their costs and the risk of default by the debtor.

What should the assignment agreement contain

The assignment of a claim can take various forms. Sometimes the receivable is assigned free of charge, for example in the context of internal transfers within the company or between related parties. At other times, the creditor sells the receivable and the assignor must pay the creditor a certain amount in return for taking over the right to recover the receivable from the debtor.

If you want to get everything right, have an attorney prepare a good assignment agreement. This will avoid any inconvenience caused by improper process and handling of the assignment.

An assignment agreement is a legal document that formally sets out the terms and conditions under which the claim is transferred from the assignor to the assignee. This agreement is only valid if it contains several essential matters.

  • Specification of the parties: the contract must clearly identify who is the assignor and who is the assignee.
  • Subject matter of the contract: This is the assigned claim. It too must have an unambiguous specification, including its value, terms of repayment and any interest, penalties, etc.
  • Terms of assignment: The contract must also specify in detail and precisely under what conditions the claim is assigned. This point is all the more important if the claim is assigned for consideration.
Tip na článek

Tip: You don’t want to assign your claim, but are wondering how you can collect it yourself? You can read about how to recover a debt in our article.

Acceptance of debt: How is it different from an assignment of debt?

From a legal point of view, accession to debt is a completely different institution. Whereas in an assignment the assignee takes over all rights from the assignor, in an accession to debt the third party assumes the responsibility for the performance of the debt. Going back to our example from the beginning, in the case of an assignment of debt, Helena will take Kamil to help her pay. This means that in addition to the original debtor (Helena), a new person (Kamil) is created who also has the obligation to fulfil the obligation (repay).

The accession to the debt most often takes place when the original debtor becomes insolvent and the creditor wants to be sure that his claim will be paid. In practice, apart from individuals, this happens, for example, in a corporate environment where a parent company accedes to the debts of its subsidiary.

In contrast to an assignment of debt, the accession to the debt takes place with the active participation of the debtor and the creditor. The creditor enters into a contract with a third party (Kamil), on the basis of which this person becomes a co-obligor. The creditor thus has the advantage of having more than one entity from which it can demand payment.

Summary

The assignment process is often used when the creditor does not want to or cannot collect the debt itself. Assignment of receivables is common in the business environment, where factoring companies are often used to manage receivables efficiently. Do not underestimate the help of an attorney when drafting an assignment of receivables agreement. A lawyer will ensure that the contract correctly specifies the parties, accurately describes the subject matter of the contract (the receivable) and clearly defines the terms of the assignment. A properly drafted agreement will protect you as a creditor from any risks associated with an improper assignment process.

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Author of the article

JUDr. Ondřej Preuss, Ph.D.

Ondřej is the attorney who came up with the idea of providing legal services online. He's been earning his living through legal services for more than 10 years. He especially likes to help clients who may have given up hope in solving their legal issues at work, for example with real estate transfers or copyright licenses.

Education
  • Law, Ph.D, Pf UK in Prague
  • Law, L’université Nancy-II, Nancy
  • Law, Master’s degree (Mgr.), Pf UK in Prague
  • International Territorial Studies (Bc.), FSV UK in Prague

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