Contract of Assumption of Debt

Contract of assumption of debt represents agreement between a debtor and a person assuming the debt in which the creditor has agreed to change the debtor of obligation by contract.

Assumption of debt is regulated by the provisions of Articles 446. to 450. of the Law on Contract and Torts and represents one of the ways provided for by the law of the debtor’s change and by the conclusion of the contract.

According to the provisions of the Law on Contract and Torts contract of assumption of debt is informal contract. However, if the debtor and the third party by the agreement transfer a debt to a third party, which has a source in a contract, which according to the law must be concluded in a certain form (eg, written or certification of the court), and an agreement of assumption of debt must be concluded in the same form.

Contract of assumption of debt have a legal effect regardless of the motive, which have directed the debtor and a third party – a person assuming the debt to conclude an contract by which a third party will assume the debt of the debtor to himself.

Debts which can not be transfered

The subject of the contract of assumption of debt can not be a liability, which is not suitable for transfer as subject of obligation, since it is related to the personality of the debtor or a legal nature of the debt indicates that it can not be assumed.

Consent of the creditor as a condition of assumption of debt

Contract of assumption of debt produce legal effect unless the creditor has given his consent to the concluded contract between the debtor and the person assuming the debt. Otherwise the contract of assumption of debt can neither arise nor to produce legal effect.

About a conclusion of the contract of assumption of debt the creditor, pursuant to the provisions of Article 446, paragraph 2 of the Law on Contract and Torts may be notified by the debtor and a person assuming the debt. After receiving of the notice about the conclusion of the contract the creditor may extend his consent to each of these persons on the assumption of debt in other words to the debtor and the creditor as a contracting parties.

Consent must be given by an unambiguous statement of a creditor in a form that is provided for the conclusion of the contract of assumption of debt.

Also the Law on Contract and Torts has established a legal presumption of giving consent of the creditor on concluded contract of assumption of debt in the accurately described situation by the law. According to the provisions of Article 446 paragraph 3 of the Law on Contract and Torts it shall be presumed that the creditor has extended his consent after accepting without reservations some kind of fulfilment effected by the person assuming the debt in his own name. This legal presumption is by its legal nature rebuttable.

Effect of assumption of fulfilment

A contract of assumption of debt shall have the effect of a contract of assumption of fulfilment for the time of creditor’s deciding about his consent to the contract of assumption of debt, as well as should he refuse his consent.

Assumption of fulfillment is carried out also by contract between the debtor and a third party – in this case a person assuming the fulfillment, by which he obliges the debtor to fulfill his obligation to the creditor, which is the difference between the contract of assumption of debt and the contract of assumption of fulfillment.

Contract of Assumption of Debt Guaranteed by Mortgage

In the case of real property being under mortgage, should the transferee and the transferor stipulate that the transferee shall assume a debt owed to the mortgage creditor, the mortgage creditor shall be considered to have extended consent to the contract of assumption of debt after not refusing it at the wirtten request by the transferor, within a three month time limit from the day of accepting such request.

To legal presumption comes into force, and produce the expected effects, the creditor must be invited to give consent and in the wirtten request should be pointed out to him specifically the consequence of his denial, in other words that if within three month time limit doesn’t give statement by which refusing consent, it shall be considered to have extended consent to the contract of assumption of debt guaranteed by mortgage.

The creditor may prevent to perform law cited assumption, only with the explicit statement that he object to assumption of debt, which must be given in strictly determined within a three months time limit.

Effect of the Contract of Assumption of Debt

Substitution of debtor is the most significant effect of the contract of assumption of debt. To make this change occurred, the contract of assumption of debt must meet all the requirements, and must be concluded between the debtor from the obligation and a person assuming the debt, and must be approved, in other words the creditor must consent it.

Insolvency of the person assuming the debt

The debtor shall be exempted from the obligation concluding the contract of assumption of debt, if at the time of creditor’s consent to the contract of assumption of debt the person assuming the debt was charged with debts, and the creditor was not aware of it, or had no duty to be aware.

In this situation, the debtors of mentioned obligation shall be the previous debtor and a person assuming the debt in other words the contract of assumption of debt shall have the effect of a contract of joining a debt.

Contract of Assumption of Debt and creditor’s accessory rights

By the provisions of Article 449 of the Law on Contract and Torts have been regulated expressly the effect of the conclusion of the contract of assumption of debt on the creditor’s accessory rights.

Accessory rights which existed with the claim until then shall continue, but the guarantees, as well as security, supplied by third parties, shall be terminated should the guarantors and pledgers fail to consent to liability for the new debtor as well.

It is especially important to point out that uncollected interest does not fall under the general regime of accessory rights, but the law specifically prescribes that unless otherwise stipulated, the person assuming a debt shall not be liable for uncollected interest due until the assumption of debt.

Objections of the person assuming a debt

According to the provisions of Article 450 of the Law on Contract and Torts a person assuming a debt may raise against a creditor all objections arising from the legal relationship between the previous debtor and the creditor serving as a ground of the debt assumed, as well as objections pertaining to the person assuming debt against the creditor.

However a person assuming a debt shall not raise against the creditor objections originating from his legal relationship with the previous debtor.

Contract of Assumption of Debt and the statute of limitations

Contract of assumption of debt will not result in an extension of the statute of limitations of the assumed debt. The statute of limitations will run smoothly and continuously, because at the time of obsolescence shall be included and the time which has run in favour of the debtor’s predecessors.