Acknowledgment of debt and agreement to a repayment plan

For a debt to be recognized as valid, the debtor must acknowledge it in writing to the creditor, indicating the reason and amount.

Let’s look at the elements of a debt receipt, the most common mistakes when drafting it, and the specifics of the repayment plan agreement.

Why the Debt Recognition is Important

Section 2053 of the Czech Civil Code governs debt recognition. A creditor who has received an acknowledgment of a debt from his debtor finds himself in a more advantageous legal position since the acknowledgment of a debt shifts the burden of proving the existence of the debt to the debtor and extends the statute of limitations to 10 years.

In practice, a repayment plan agreement, under which the debtor agrees to repay the debt in specified installments, often links the acknowledgment of a debt to it.

For a debt acknowledgement to be legitimate and have the intended effects, it must adhere to certain formalities.

Examples illustrating Potential Errors in the Formulation of Debt Recognition

Example 1

“The debtor acknowledges his debt to the creditor for CZK 100,000.”

This formulation does not contain the reasons for the debt, so we cannot discuss its actual recognition.

Example 2

“The debtor acknowledges his debt to the creditor in the amount of CZK 100,000, arising on the basis of the purchase and sale agreement.”

This wording indicates the amount of the debt and the legal basis for the debt, but it does not specify what kind of purchase and sale agreement we are talking about. This may invalidate the debt if there are multiple agreements between the parties.

Example 3

“The debtor acknowledges his debt to the creditor in the amount of CZK 100,000, arising on the basis of invoice No. 19960529.”

This wording contains a reference to the invoice regarding the reason for the debt. Such a procedure is usually possible if the invoice contains a legal basis for the debt (for example, an indication of the goods delivered is sufficient). If the invoice contains a general description of the goods or services supplied, this may again invalidate the acknowledgement of the debt.

Understanding Installment Plans and Loss of Benefit Provisions

A payment schedule, or installment plan, is a common practice in debt resolution. It allows the debtor to repay the debt in installments over time, often with added interest.

Crucially, creditors should consider negotiating a loss of benefit clause. This provision allows the creditor to demand full repayment of the debt if the debtor misses any payments.

While the law allows for loss of benefit clauses, they must be explicitly agreed upon by both parties. In practice, installment agreements often omit this clause, leaving the creditor with limited recourse in case of default. They can only pursue legal action for individual missed payments, which can be costly and burdensome.

Debt recognition is a tool that can strengthen the creditor’s legal position and increase the likelihood of recovering the debt. It can be combined with other instruments, such as notarial deeds, pledges, or promissory notes.

Conclusion

When using receipts or installment agreements, formal rules must be followed to ensure their legal effectiveness. It’s advisable for creditors to include a provision for early repayment of the entire debt in installment agreements.

For complex or high-value claims, consulting with legal professionals is recommended. They can offer alternative strategies for securing claims and developing a comprehensive resolution plan.

Contact our specialists for guidance on debt recognition and recovery strategies.

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