An acknowledgement of debt refers to an agreement between a debtor and a creditor, whereby the debtor unequivocally admits that it owes the creditor a specific debt and further sets out the process in which the debtor aims to pay back such debt.
An acknowledgement of debt ("AOD") is commonly utilised in the debt collection process to shorten the legal process should the debtor again fall behind in repaying its debt. A validly concluded AOD would allow a creditor to move past having to prove that the debt is owed due to the unequivocal admission by the debtor.
What Should An Acknowledgement of Debt Say?
It is important to note that unlike most agreements, an AOD is by nature extremely one-sided as its intent is to protect the creditor against any further default by the debtor.
For the AOD to operate as intended, it is important that the debtor's admission be clear and concise. What the debtor is admitting to owing and the source or agreement from which the debt arose needs to be properly described and set out.
In addition, the AOD may include the following pertinent clauses:
- Terms which set out how and when payment will be made,
- Breach clauses, including an acceleration clause, should the debtor default,
- Clauses that set out interest,
- Clauses that set out how legal costs will be dealt with.
How to Enforce Your AOD?
An AOD may be enforced through the ordinary action process by issuing and serving summons on the basis of the AOD. The AOD is essentially a liquid document; therefore, a creditor may also opt for the provisional sentence summons route. In addition, the AOD may include a clause that allows for the agreement to have been made an order of court. In other words, the parties have consented that the AOD may be made an order of court. Therefore, should the agreement have immediately been made an order subsequent to signature, it would allow for a creditor to then move to the relevant post-judgment process in order to enforce the AOD.
Conclusion
AODs are a useful tool in the debt collection process and allow for a creditor to have a certain degree of piece of mind in respect of securing the debt owed to it. In saying that, however, it is important for debtors to understand the implications of signing this agreement. The emphasis for the debtor is on the "admission". Considering this, the debtor needs to be aware that disputing that the debt is owed subsequent to the signing of an AOD would be extremely difficult.
Written by Raeesa Ebrahim Atkinson, SchoemanLaw Inc