A creditor beneficiary example would be an individual or legal entity that is entitled to receive benefits from a contract to satisfy a debt or legal obligation.

Creditor Beneficiary Law and Legal Definition

A creditor beneficiary can be defined as being owed or being believed to be owed a legal obligation by a promisee that is provided upon a promisor's execution of his or her portion of a contract or agreement. "Creditor beneficiary" is a term that refers to a legal entity that will intentionally benefit from an agreement that has been put in place to satisfy or reduce a debt. A creditor beneficiary is a specific type of third-party beneficiary. Creditor beneficiaries are not active parties in the execution of the agreement they are to benefit from.

Generally speaking, a stranger to a contract does not acquire any rights under the contract in question. There is an exception, though, in the doctrine associated with third-party beneficiary contracts. With a contract of this nature, third parties may be able to enforce the promise that has been made for their benefit even though they are strangers to both the contract and any considerations. The third party, however, must be one of the following:  

  • A donee beneficiary  
  • A creditor beneficiary

In other words, creditor beneficiaries are a third party that has been designated to receive the benefits associated with the execution of a contract between to other parties. They are to receive the benefits of the contract because specific obligations that the promisee owes to them. The benefits that creditor beneficiaries receive are meant to satisfy a debt that is owed to them. Contracts of this nature name a number of different parties, such as:  

  • The debtor, or promisee  
  • The promisor  
  • The creditor, or creditor beneficiary  

The debtors, also known as the promisee, are the individuals or legal entities that owe a debt to the creditors. They will enter into a contractual agreement with the promisor who is then expected to pay off the debt on the debtors' behalf.  The creditors, or creditor beneficiaries, are the parties that are intended to receive the benefits of completing the contractual agreement between the debtors and the promisors.

What Are Beneficiaries?

Simply put, beneficiaries, as the name suggests, receive a benefit of some sort. For example, people receiving an inheritance because they were named in somebody else's will are considered beneficiaries. Others may be listed on an insurance policy which, when a payment is issued, the those named receive some or all of the payment. This is another example of a beneficiary. Third-party beneficiaries receive benefits from a contract that they are not directly involved in.

In most contract scenarios, there are only two parties involved:  

  • The promisor  
  • The promisee  

In certain situations, however, there may be a third party involved. This third party is typically known as a third-party beneficiary. 

Creditor beneficiaries are a specific type of third-party beneficiary that receives benefits from a promise that has been made to meet certain legal obligations. Say that somebody owes a significant amount of money to a creditor, for example. The person that owes the debt is known as the debtor. The debtor will loan money to a promisor who is then to use the money to pay off what the debtor owes to the creditor.

The promisor's responsibility is to make sure that the promise to pay is enforced. The promisees are the ones that the promise to pay has been made to. In this scenario, the contract is between the debtor and the promisor. The consideration of the agreement is the promise to pay the creditor the money that the debtor owes them.

All of this means that the creditor is effectively the third-party beneficiary. In the event that the promisor fails to pay the money owed to the creditor, the creditor has the right to pursue legal action against the promisor and will most likely win. Even though the creditor was not directly involved in the agreement, the debtor and the promisor both intend for the creditor to become the beneficiary. This means that both the creditor and the promisee have rights that can be enforced against the promisor if they fail to pay according to the agreement.

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