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What is a Debt Assignment?

Mary McMahon
By
Updated May 16, 2024
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Debt assignment is a procedure that transfers debt from an original creditor to a new creditor. By contrast, in debt assumption, a new debtor takes over an existing debt from the previous debtor, absolving the original debtor of any responsibilities associated with the debt. For debt assignment, debtors are not consulted and they do not need to authorize or approve the transfer. By contrast, people cannot assume debts without permission from the creditor, as the creditor wants to confirm that the person taking over the debt has the ability to repay it.

There are a number of reasons for debt assignment to take place. Some creditors regularly sell their accounts to third parties, allowing them to collect the full amount of the debt months or years before the total is due to be repaid. These companies realize a small profit from the sale of the debt in addition to receiving payment in full. Other creditors may package and sell different types of debts, such as high risk loans that they want to get rid of, often with the goal of improving their financial outlook. It is also possible to assign debts to subsidiaries to clean up the books at a parent company, an accounting practice that is sometimes used to conceal bad debts or to obscure the truth of a company's finances.

Companies that offer loans must consider the way those loans appear on the books. If a lot of a company's capital is tied up in loans and a company has many nonperforming or high risk loans, it has low liquidity and may be endangered by changes in the economy or mass defaults. Such companies are not appealing to investors and they can raise concerns among regulators and other interested parties. For these companies, debt assignment allows them to increase their liquidity and clean up their books, creating a more appealing financial profile.

When debt assignment takes place, the debtor is notified about the change in creditors. Contact and payment information for the new creditor must be sent, along with any changes in terms that are associated with the transfer. Likewise, if the creditor wants to change the terms at some later date, notifications must also be sent in a timely fashion to give the debtor an opportunity to respond. The same legal rights and protections for the debtor that applied to the relationship with the original creditor are still in force.

If a notice informing a debtor that debts have been transferred is received, it is advisable to contact the original creditor to confirm the transfer and to get accurate contact information for the new creditor. This information should be kept on file so that people know how to contact their creditors. The new creditor should also send out a package with information including privacy agreements and contact information.

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Mary McMahon
By Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a SmartCapitalMind researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

Discussion Comments
By anon328682 — On Apr 05, 2013

Is it permitted under Indian law to transfer your debt to the person who owes you the money?

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a...

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