Where assumption of debt shows up
Assumption of debt usually appears in business acquisitions, real estate transfers, divorces and partnership breakups, and family transfers of property. The buyer or the incoming party agrees to become responsible for an existing obligation, but that agreement is between the parties to the deal. Unless the lender agrees to release the original borrower, often through a formal release or a novation, the original borrower usually remains liable alongside the new one. Many loan documents also restrict transfers, and a mortgage commonly contains a due-on-sale clause letting the lender call the loan if the property changes hands without consent, though federal law limits this for some family transfers of a home. A deal that ignores the lender can create a default on its own.
Paperwork that matters
Gather the original loan agreement, any guarantees, the security documents, and every amendment, since the terms the new party takes on are the terms already in place. The purchase or separation agreement should say exactly which debts are being assumed, as of what date, and what happens if the new party stops paying. Indemnity provisions, which let the original borrower recover from the new party, are only as useful as that party's ability to pay. If the lender has agreed to anything, get it in writing and signed by someone with authority. Personal guarantees deserve special attention, because they often survive a transfer of the business.
Questions we sort out first
If you are taking on a debt, we look at what the lender's consent process requires, whether the loan terms are worth assuming, and how the price reflects the obligation. If you are the one handing it off, we look at whether a release is achievable and what protection the deal gives you if it is not. If a lender is already pursuing you for a debt someone else promised to pay, we review the agreements to see what claims you may have against that party and what defenses you have against the lender. Each situation calls for different drafting, so we start with where you sit in the transaction.
