Assignment of Payments Form. To download, please click here.

If you have customers who are chronically late because they can' t collect on time from third parties, you may want to consider using assignments to get payments directly from those third parties. This stops the funds from going through the debtor and prevents the debtor from being tempted to use the funds to pay someone else.

"Ordinarily, assignments for the payment of money are valid, even without the consent of the third party," says Stanley Turk, formerly an attorney with the law firm of Smith, Somerville & Case (Baltimore, Md.), and now an assistant attorney general for the State of Maryland, who frequently represented owners, developers, contractors, and design professionals in the recovery of accounts receivable.

"An assignment is not valid if it materially changes the risk or obligations of the third party, or violates public policy," he says. "In some cases, however, even if a contract prohibits assignments, the assignment may be valid anyway."

The Specifics
There are several specific points your assignment agreement should cover if you want to have the best protection:

• Assurance that the debt is clear of controversy. "The basic rule is that you, as the assignee, get whatever rights your debtor has from the third party," Turk says. "However, you are also subject to whatever defenses the third party has against your debtor. Therefore, it's important to contact the third party and make certain there are no problems with the debt before you enter into the assignment agreement."

• Guarantee that your customer will cover any remaining debt. The contract of assignment should contain guaranty and indemnity language that holds your customer--the original debtor--liable to the extent that the debt is not paid by the third party.

• Obligation to help in a lawsuit. "The assignment agreement should also contain a provision under which the debtor is obligated to assist you in getting payment from the third party if such payment is not forthcoming," Turk says. "This would include reasonable participation in a lawsuit, if necessary, to recover from the third party."

• Specific authorization. The assignment agreement should specifically authorize the third party to pay you the amount of the assignment. It is advisable to have the debtor sign a separate writing specifically directing the third party to pay the assignment funds to you.

• Limited right to sign. "Because the third party may want to protect itself, it may choose to issue joint checks or, in fact, issue checks only payable to your customer," Turk warns. "In this case, it is advisable to include a clause which gives you, the creditor, the right to sign the checks."

Assignment of Payments Form
Turk offers a basic form which can be used for third-party assignments. As with any boilerplate, it should be carefully tailored by an attorney to meet individual needs.

We've posted this form in our download area. To download it, click here.