In the complex financial landscape of the United Kingdom, understanding the nuances of ‘Assignment of Debt’ is essential for both creditors and debtors. This concept, often encountered but not always fully understood, involves the transfer of a debt obligation from the original creditor (the assignor) to a third party (the assignee).
This article aims to demystify the intricacies of debt assignment, explaining its types, legal implications, and impact on individuals’ financial standings.
Whether it’s about navigating through the differences between legal and equitable assignments, understanding the role of deeds, or grasping how such transactions affect your credit report and legal rights, this guide provides a comprehensive overview, ensuring that you are well informed about this critical aspect of financial management in the UK.
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What Does ‘Assignment of Debt’ Mean?
Assignment of Debt: a term that might sound complex, but it’s really quite straightforward. Let’s dive into what this means for you.
Simply put, your original creditor, known as the assignor, transfers your debt to another party, the assignee. This could change who you deal with regarding your debt. The assignee can now take legal steps to recover the debt from you. Thus, this might include court action.
How Debt Assignments Work
When a creditor offers credit to a borrower, they do so believing that the money they lend, along with the interest, is repaid on time. So, the lender waits to recover the money owed according to the timeframe stated in the contract.
In some situations, the lender might decide that they want to sell the debt to a third party because they no longer want to assume responsibility for servicing the loan. In this case, the debtor should be sent a Notice of Assignment (NOA). This should state that someone else is now responsible for collecting the outstanding debt. This is called a debt assignment.
Take a look at this forum post where a user states that they were not reached out to but did not receive a notice:
It’s mandatory to inform the debtor when the debt is assigned to a third party so that they are aware of who they should pay the debt to. The payments won’t be accepted if the debtor ends up sending payments to the old creditor after they’re assigned. This might result in the debtor unintentionally defaulting.
Also, once the debtor receives this notice, it’s best that they verify that the new creditor has recorded the correct monthly payment and total balance. In some situations, the new assignee might even decide to make changes to the original terms of the loan. In this case, the creditor should notify the debtor without delay and give them sufficient time to respond.
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Legal Assignment vs Equitable Assignment
A legal assignment is when another company takes over the following from a creditor:
- Benefit of a debt
- The right to enforce the debt
This indicates that they have the right to seek court action over the loan.
However, when it comes to equitable assignment, it only transfers the benefit of the loan to a third party. In this case, there is no right to seek court action over the loan. Thus, in a situation where the assignee wants to take the debtor to court, they only have the right to work with the original creditor after the original creditor decides to take the debtor to court.
So, simply said, they don’t have the power to initiate court action themselves. Also, note that in order for the assignment to be effective, the debtor must be notified regarding the assignment. The debtor is obligated to make the payment to the assignee only after they get the notice.
Assignment vs Novation
When it comes to the assignment, the party that assigns will continue performing the obligation associated with the loan. However, the assignee is now entitled to the loan benefits.
For example, assume that you assign a debt, that a debtor owes to you, to another organisation. In this situation, you have some rights and obligations over the loan. But particularly the right to pursue legal action in court.
Meanwhile, when it comes to novation, it consists of a full transfer of both rights and obligations. For example, as per the previous scenario, the creditor would give the assignee company full power when it comes to both the obligations and the rights associated with the loan.
Assignment vs Selling
As mentioned before, the assignment of debt means that the right of an individual to collect a debt has been transferred legally from the assignor (original creditor) to the assignee (third party). Then, the debtors are informed regarding the assignment. They should then make the payments to the assignee.
However, keep in mind that the conditions and terms of the contract do not change.
When it comes to selling debt, this is where a lender sells their loan to another, usually for a lesser amount than what it’s worth. The buyer (most of the time a debt collection company) tries to collect the whole amount from the debtor.
Does an Assignment Need to be a Deed?
When delving into the law of assignment, a crucial question often pops up: is a formal deed essential to make the transfer of debt legitimate? The answer isn’t as straightforward as you might think. Let’s unpack this:
Often, a less formal agreement can do the job. However, in some cases, particularly when the original loan agreement was a deed, a deed for the assignment becomes necessary.
Understanding the importance of deeds in this context is key. If your original loan agreement was signed as a deed, the assignment might also need to be a deed. This adds a layer of formality and legal binding. A deed indicates a more serious commitment, making everyone involved fully aware of the transfer’s details.
Knowing your rights in these situations is non-negotiable:
- Whether it’s through a deed or an agreement, you’re entitled to be informed about the assignment. This ensures the process is fair and transparent.
- This notification is more than just a formality; it validates the transfer and helps you understand the change in your debt obligations.
- The use of a deed or agreement provides legal clarity. This helps in understanding your position in the new arrangement.
- In such situations, seeking legal or financial advice can be a wise move.
In the complex world of debt assignments, whether a deed is necessary depends on various factors. Understanding the role of deeds and your rights is essential in navigating these financial waters.
Benefits of Assignment of Debt
There are multiple reasons why a creditor might decide to assign the debt to another person. One of the main reasons for this is to improve liquidity or to reduce the risk. In some cases, the lender might also be wanting some capital urgently. Also, they might have accumulated a large amount of high-risk loans and be wary that most of them could default.
In such situations, lenders may be willing to assign them to another person swiftly, even for a very small amount. They are open to doing this as long as it will help to improve their financial outlook and appease worried investors.
In other cases, the creditor might decide the debt is too old to spend resources trying to collect it. They might even assume that since it’s old, it’s not worth assigning it to a third party to pick up the collection activity. In such an instance, a company will decide not to assign their debt to a third party.
Criticisms of Assignment of Debt
Even though the assignment of debt may seem like a good option for lenders, it also has a fair bit of criticism.
Over the past, debt buyers have been known to use various unethical practices in order to get paid. This includes constantly harassing debtors and issuing threats. In some situations, they have also been accused of chasing debts that have already been paid.
Additional Advice and Guidance
If you’re struggling with debt, note that there are many debt solutions available in the UK that you can consider taking up. Some of these include:
However, note that while the right debt solutions will help to write off debt, choosing the wrong one might worsen your situation. So, we recommend you reach out to a debt charity for advice before you make the decision. Some debt charities you can reach out to include:
- National Debtline
- Citizens Advice
- StepChange
Alternatively, feel free to fill out our online form, and our MoneyAdvisor team will guide you.
Key Points
- It refers to the transfer of a debtor’s obligation from the original creditor (assignor) to a third party (assignee).
- Types of Assignments:
- Legal Assignment: Transfers both the right to collect the debt and the right to enforce it legally, including court action.
- Equitable Assignment: Only the benefits of the loan are transferred, not the legal right to enforce it.
- Assignment maintains the original terms of the loan with a new creditor, whereas novation transfers all rights and obligations to a new party.
- In assignment, the right to collect the debt is transferred, while selling involves a financial transaction where the lender sells the loan, often at a lower price.
- Generally, a deed is not required for debt assignment, but it may be necessary when the original loan agreement is signed as a deed.
- Assignment of debt will be reflected in the credit report, including any updates on the loan terms and the new lender’s name.
- A formal notice is required, especially in legal assignments, to inform the borrower about the transfer of their debt.
- Once a notice is issued, the new creditor assumes the rights and obligations of the debt and may engage in various debt collection methods.
- Common reasons include avoiding the hassle of debt collection, lacking resources for legal action, or efficiency in debt collection through a third party like a collection agency.
- Under UK law, most debts have a limitation period of six years (twelve for mortgage loans), after which they might be written off if there’s no contact from the creditor.
FAQs
Under UK law, the limitation period for most debts is six years. For mortgage loans, it extends to twelve years. If your creditor hasn’t contacted you within these time frames, you may have legal grounds to have the debt written off. This includes personal loans, credit cards, payday loans, and others.
The new lender takes on both the obligations and rights of the mortgage loan. Though rare, borrowers can also assign their mortgage to someone else. These assignments are recorded with the county recorder’s office for legal purposes.
Your credit report will reflect the change in lender and any new loan terms. You’ll see the new lender’s name instead of the old one. If you default under the new lender, they will report this to Credit Reference Agencies.
Under the Property Act 1925, it’s a formal notification to the borrower that their debt has been acquired by a new company. This notice is required in cases of legal assignment.
The new creditor assumes the benefits and obligations of the debt. They may hire a collection agency or use other methods to recover the debt, often avoiding court action to minimise costs.
Assigning debt is often done to avoid the trouble of collecting it. Some may lack the resources to take legal action against debtors. If a third party, like a debt collection agency, can handle repayment collection more efficiently, it’s a preferred choice.
