An assignment of credit is a contract by which the owner of a credit (the assignor, the original creditor) transfers to another (the assignee) their credit and its accessory rights, either onerously (for a price, like a sale of the receivable) or gratuitously (as a donation). The assignee steps into the shoes of the assignor and acquires the right to collect the debt from the debtor, together with all the accessory rights, such as a guaranty, a mortgage, a pledge, or a preference. Assignment of credit is a common financing tool, for example, a business selling its accounts receivable to a factor. A key point concerns the debtor. The consent of the debtor is not required for the validity of the assignment; the creditor may assign the credit without the debtor's agreement. However, notice to the debtor is important for a practical reason: the debtor who pays their original creditor before having knowledge of the assignment is released from the obligation, because they paid in good faith to the person they knew as their creditor. So the assignee should notify the debtor of the assignment; once the debtor knows, they must pay the assignee, not the assignor. As to warranties, in an onerous assignment (a sale of the credit), the assignor generally warrants the existence and legality of the credit at the time of the assignment (that the credit is genuine and exists), but does NOT, as a rule, warrant the solvency of the debtor, unless it has been expressly stipulated or the insolvency was prior and public; so if the debtor turns out to be insolvent, the assignee generally bears the loss, absent a warranty of solvency. When a credit in litigation is assigned (a litigious credit), the debtor has a right of legal redemption to extinguish it by reimbursing the assignee the price paid plus costs and interest. So an assignment of credit transfers a debt and its accessory rights to a new creditor, without needing the debtor's consent, though notice to the debtor is important, and the assignor warrants the credit's existence but generally not the debtor's solvency.
What Assignment of Credit Is
An assignment of credit transfers a creditor's right to collect a debt (and its accessory rights — guaranty, mortgage, pledge) to an assignee, for a price or gratuitously. The assignee steps into the creditor's shoes.
The Debtor's Position
The debtor's consent is NOT required for the assignment's validity. But notice matters: a debtor who pays the original creditor before knowing of the assignment is released. So the assignee should notify the debtor, who must then pay the assignee.
Warranties and Litigious Credits
In an onerous assignment, the assignor warrants the credit's existence and legality, but not the debtor's solvency (unless stipulated) — so the assignee bears an insolvent debtor's loss. For a litigious credit, the debtor may redeem by reimbursing the price plus costs and interest.
Practical Takeaways
- Assignment of credit = selling/transferring the right to collect a debt;
- No debtor consent needed, but notify the debtor;
- The assignor warrants the credit's existence, generally not solvency.
Frequently Asked Questions
What is an assignment of credit? A contract by which the original creditor transfers to another their credit and its accessory rights, either for a price or gratuitously. The assignee acquires the right to collect the debt from the debtor.
Does the debtor need to consent to an assignment of credit? No. The debtor's consent is not required for the validity of the assignment. However, notice to the debtor is important, because a debtor who pays the original creditor before knowing of the assignment is released from the obligation.
Does the assignor guarantee that the debtor will pay? Generally no. In an onerous assignment, the assignor warrants the existence and legality of the credit but not the solvency of the debtor, unless expressly stipulated or the insolvency was prior and public.
What is a litigious credit? A credit that is the subject of a pending lawsuit. When a litigious credit is assigned, the debtor has a right of legal redemption to extinguish it by reimbursing the assignee the price paid plus costs and interest.
This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.
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