What is an Indenture?

Mary McMahon
Mary McMahon

An indenture is a formal legal document providing information about the contract terms associated with a debt obligation. The parties to the debt retain their copies of this agreement in case there are questions or disputes about the debt. Once the debt has been discharged, the contract is considered complete and there are no additional obligations. Indentures today are most commonly seen with bonds and real estate transactions, where the mortgage agreement is a form of indenture.

Some modern forms of indentured servitude resemble the characteristics of slavery.
Some modern forms of indentured servitude resemble the characteristics of slavery.

Many people associate this term with indentured servitude, where people would agree to work for a set period of time to pay off a debt. The indentured person would be provided with basic necessities during the time of service and then released. Indentured servitude is illegal in many regions of the world today, and the term “indenture” in the sense of a debt obligation does not usually refer to human bondage, unless people are discussing the historic use of indentured laborers.

For mortgages, the indenture discusses what is being used as collateral for the loan and how the debt will be handled in the event of a default.
For mortgages, the indenture discusses what is being used as collateral for the loan and how the debt will be handled in the event of a default.

The modern indenture gives notice about the nature of the debt and the terms agreed to by both parties, including the term of the debt, the interest, and other matters. In the case of a bond indenture, information about bond payments and the length of the debt is included. For secured debts like mortgages, the indenture also discusses what is being used as collateral for the loan and how the debt will be handled in the event of a default.

Like other legal documents, indentures should be read with care. People should make sure they fully understand the terms and conditions. If something does not make sense or is unexpected, clarification can be requested from the originator of the document. Reviewing documents before entering a contract is advised to give people an opportunity to request rewording of problematic aspects of the contract. An attorney can look over any documents people have questions about to look for common pitfalls, as well as less common legal issues.

Etymologically, the origins of the term “indenture” are rather intriguing, for people interested in word origins. Originally, these documents were generated by writing out two copies of the agreement on a single sheet of paper and then cutting that paper in a distinctive pattern. To verify the authenticity of the document, people could fit the two halves together and confirm they fitted. The distinctive spikes created by the cutting resembled a set of teeth, explaining the term “indenture.”

Mary McMahon
Mary McMahon

Ever since she began contributing to the site several years ago, Mary has embraced the exciting challenge of being a wiseGEEK researcher and writer. Mary has a liberal arts degree from Goddard College and spends her free time reading, cooking, and exploring the great outdoors.

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