Novation of debt

[bizcoachddd]

Does anybody know about letters of Novation?

I believe this is where a new agreement is substituted for a previous one.

Sometimes it transfers the obligation to a third party, sometimes it offers a lower full and final settlement on the basis that the debtor has no realistic prospect of ever repaying the entire debt in a reasonable timeframe.

I heard that one sends them the letter and a payment in F & F settlement and by accepting the payment they also accept the 'new' contract and have to put on the record that the account is settled.

[cerberusalert]

NOVATION - Novation is a substitution of a new for an old debt. The old debt is extinguished by the new one contracted in its stead; a novation may be made in three different ways which form three distinct kinds of novations.

 

The first takes place without the intervention of any new person, where a debtor contracts a new engagement with his creditor, in consideration of being liberated from the former. This kind has no appropriate name and is called a novation generally.

 

The second is that which takes place by the intervention of a new debtor, where another person becomes a debtor instead of a former debtor, and is accepted by the creditor, who thereupon discharges the first debtor. The person thus rendering himself debtor for another, who is in consequence discharged, is called expromissor; and this kind of novation is caned expromissio.

 

The third kind of novation takes place by the intervention of a new creditor where a debtor, for the purpose of being discharged from his original creditor, by order of that creditor, contracts some obligation in favor of a new creditor. There is also a particular kind of novation called a delegation.

 

It is a settled principle of the common law, that a mere agreement to substitute any other thing in lieu of the original obligation is void unless actually carried into execution and accepted as satisfaction. No action can be maintained upon the new agreement, nor can the agreement be pleaded as a bar to the original demand. But where an agreement is entered into by deed, that deed gives, in itself, a substantive cause of action and the giving such deed may be sufficient accord and satisfaction for a simple contract debt.

 

The general rule seems to be that if one indebted to another by simple contract, give his creditor a promissory note, drawn by himself for the same sum, without any new consideration, the new note shall not be deemed a satisfaction of the original debt unless so intended and accepted by the creditor. But if he transfer the note he cannot sue on the original contract as long as the note is out of his possession.

 

NOVATION AGREEMENT - A legal instrument executed by (a) the contractor (transferor), (b) the successor in interest (transferee), and © the by which, among other things, the transferor guarantees performance of the contract, the transferee assumes all obligations under the contract, and the purchaser recognizes the transfer of the contract and related assets.

 

http://www.lectlaw.com/def2/n027.htm

[T Smith]

There is article on novation and the difference between novation and assignment at Net Lawman (I can't post the link because I am new).

 

Novation changes the parties to a contract, and doesn't change the contract itself. The consideration doesn't have to be less than the original debt, it could be any deal. There are lots of circumstances in which a debt might be novated, and the one you mention is just one. A more common one is where a company is sold, and the debt obligations are transferred to the buyer (for example, stock on loan).

 

Novation requires the consent of all parties involved, a letter like the one you refer to is usually just an assignment of the debt, which isn't always possible in all circumstances.