Last edited 02 Dec 2021

Assignment of debt

1 Introduction
2 Overview of assignment of debt
3 Different types of assignment of debt
4 Payment modifications
5 Related articles on Designing Buildings
6 External resources

[edit] Introduction

Assignment is the right to transfer 'choses in action' defined as 'all personal rights of property which can only be claimed or enforced by action and not by taking physical possession'. This definition includes benefits arising under a construction contract such as right to payment, but not burdens such as the obligation to pay. The definition also includes claims for breach of contract.

For more information, see Assignment of choses in action.

It is a common mistake to assume that the right to assign must be agreed as part of a contract, for example with novation. Assignment is a unilateral right created by statute, Section 136 of the Law of Property Act 1925 or by the law of equity (law developed by the Chancery Division of the High Court of England and Wales).

For more information, see Difference between assignment and novation.

[edit] Overview of assignment of debt

An assignment of debt (debt assignment or assignment of loan) occurs when the original creditor in the transaction transfers the debt to a third party (the assignee) that is, the right to receive repayment of the debt or loan that is being assigned.

The original creditors may decide to assign debts when the pursuit of collection requires too much time, effort or money to recover. The creditor may find that transferring the debt to an assignee is more practical in terms of resources and expertise. The creditor may also pursue debt assignment to improve liquidity within the organisation. This may happen when cash flow is insufficient or when the possible risk associated with the loan becomes problematic.

If a debt is assigned to a third party, changes to collection obligations are typically communicated to credit reference agencies.

[edit] Different types of assignment of debt

There are two types of assignments of debt: legal and equitable:

Legal assignment takes place when an assignee assumes both the debt and the legal right to enforce it. This is known as an absolute assignment, since it transfers all the rights, obligations, policy ownerships and interests related to the debt to the assignee.
An equitable assignment only transfers the debt without the right to pursue legal remedies. An equitable assignment may operate by way of a charge only or be part of the debt assignment or choses in action (which are ‘…all personal rights of property which can only be claimed or enforced by action and not by taking physical possession.’).

For more information, see Legal and equitable assignment.

Both types are legislated for by the Law of Property Act 1925 and both require that the creditor notifies the debtor of the change.

According to the Law of Property Act 1925, a legal assignment of debt can only take place after a notice of assignment (NOA) has been given. The purpose of an NOA is to make the borrower aware of the transfer. A legal NOA must be made in writing and signed by the original holder of the debt (also known as the assignor). Then the written notice can be delivered to the debtor.

It is not necessary to give an NOA when an equitable assignment of debt takes place. Notification may be written or verbal. Any words will suffice provided they are unambiguous.

Once a legal assignment of debt has taken place (after the delivery of an NOA), the assignee has control over the actions related to the debt. This means the assignee can proceed with debt recovery procedures including those that involve in-house collection practices, external collection agencies or court action.

[edit] Payment modifications

The debtor still maintains the same legal rights and protections held with the original creditor after a debt assignment. However, debtors who send payments to the original lender - once assignment of debt takes place - may have their payments refused. To prevent this from happening, it is advisable for debtors to confirm their receipt of the assignment of debt and to take appropriate action (such as verifying payment parameters for the amount that is still owed).

The assignee may also wish to make changes to the payment arrangement with the debtor. If this option is pursued, the assignee must alert the debtor and offer a suitable period time for the debtor to respond.