Debt assumption

Debt assumption is when a person or company takes over someone else's debt and takes their place. This means that the person or company becomes the new borrower and thus responsible for fulfilling the debt obligations, including repayment.

Debt assumption can take place in several ways and in different variations, from factoring to assuming debt in connection with a house purchase.

Below are the most common types of debt assignment and their variations.

Debt assignment in connection with house purchase

When a private individual or company buys a property with debts, such as debts incurred in the owners' association or debts for renovation or extension of the property, it will be a transfer of debt.

The seller of the property will typically be the debtor, possibly in association with the other owners of the property. This debt is transferred to the new owner in connection with the house purchase.

This debt will be described in the presentation of the home and must be included in the overall finances of the house purchase and ownership.

Sale of debt

Every day, Danish companies and individuals sell thousands of Danish kroner worth of debt.

This can happen, for example, when an individual or company has a documented claim, such as a promissory note or a judgment from the bailiff, which is sold to a company buying debt.

The company buys the debt at a discount, for example at a value equal to 80% of the face value of the debt.

The company assumes the risk and the potential gain is between 0 and 20% plus any interest and other costs incurred. The seller of the debt gets 80% of the value of the debt and loses the right to collect the amount from the debtor.

Factoring

Factoring is also a legal form of debt transfer and works in much the same way as when a company buys a promissory note.

With factoring, a company issues an invoice on your behalf for the full amount you've agreed with the customer and then pays you as a creditor, for example, 80% of the amount immediately.

You get 80% of the original revenue without having to wait for payment or spend time on administration, follow-up, bookkeeping, etc.

Some factoring and debt collection companies also choose to buy large quantities of already issued but unpaid invoices. This is also a form of factoring, but is often referred to colloquially as portfolio buying.

Buying debt requires statistics in order

You might ask yourself: "Isn't it stupid to buy unpaid debt?" And on the face of it, the answer could be yes.

But typically, buying unpaid invoices is all about having your statistics in order. When a debt collection agency or factoring company buys an invoice, it is often based on large amounts of data and knowledge about how that particular type of debtor in that specific industry pays its invoices.

Collection agencies and factoring companies don't always get all invoices paid, but their experience and data gives them an advantage in assessing risk.