Representations and Warranties

Common Representations and Warranties

In a typical debt portfolio transaction, the seller makes representations and warranties covering:

• Ownership. The seller owns the receivables and has the right to sell them free of liens and encumbrances.
• Account validity. The accounts represent valid, enforceable obligations of the debtors.
• Data accuracy. The information in the data tape is accurate and complete in all material respects.
• Documentation. Original credit agreements and account statements are available for the accounts.
• Compliance. The accounts were originated and serviced in compliance with applicable laws and regulations.
• No prior settlements. The accounts have not been settled, compromised, or discharged prior to the sale.
• No active disputes. The accounts are not subject to active legal proceedings, bankruptcy, or consumer complaints that would impair collection.

Survival and Remedies

Representations and warranties typically survive closing for a defined period (often 12 to 24 months). During this survival period, if the buyer discovers that a representation was inaccurate, it may exercise putback rights for the affected accounts or make an indemnification claim against the seller for losses resulting from the breach.

The breadth and survival period of representations are heavily negotiated. Buyers prefer broad representations with long survival periods, while sellers seek to limit their post-closing exposure. The negotiated outcome depends on the parties' relative bargaining power, the portfolio's characteristics, and industry norms for similar transactions.

Importance for Buyers

Representations and warranties are the buyer's primary contractual protection against acquiring accounts that do not match the seller's description. They complement the buyer's own due diligence by providing legal recourse if issues emerge after closing that were not discoverable during the pre-sale review period. A portfolio purchased with strong, well-crafted representations provides the buyer with greater confidence in the quality of the assets and a clear path to remedy if problems arise.