Using Restrictive Endorsements to Settle Debts

Information on restricted endorsements and UCC Codes on Negotiable Instruments

Debts are sold by the thousands everyday to third party debt collectors. Before you assume you owe it, there is caution to heed. You've probably made the mistake at least once of paying an old debt without first attempting to validate and or negotiate it! You may already know the drill- always validate first and settle later if necessary. Be sure you answer debt collector letters as soon as you receive a collection notice, see (Validation of Debt) because the law gives you 30 days to have the debt proven valid. Paying past due debts such as collection accounts and charge-offs need to be responded to in order to protect your rights.  If you do not answer you are not protecting your rights and the court will assume that you owe the debt. In most cases when debt collectors are trying to collect an old debt you do not owe one penny!  Here are some great pointers for avoiding costly mistakes.

If you do decide it is time to pay a collection item then pay it restrictively. If you do not you will end up with a "paid charge off" or "paid collection account" and that isn't your goal. Your goal is total removal.

Do I just avoid the collection agency?
No. Avoiding the debt collector is the worst thing you can do! The debt won't go away and if it's on your credit reports then you need to finalize the negotiation process with the collection agency to get it removed but...you need to go through the steps of disputing it with the credit bureaus while you are sending your Validation of Debt request to the debt collector because it may be removed with no further work needed especially if the collection agency totally fails to answer the investigation request from the credit bureaus. If it does come back as verified with the credit bureaus then wait for the collection agency to respond to your validation of debt request. Read more about Validation of Debts here. Upon finalizing the Validation of Debt process with the collection agency you can then decide if you want to pay it. You should send an offer to pay the debt (only once Validation of Debt is complete) in exchange for total deletion. This is called a restrictive endorsement where you first send a letter offering to pay the debt at a discounted amount with certain terms (i.e.: total deletion) and then follow up with a cashiers check and another letter advising that their cashing of this check constitutes the agreement (accord and satisfaction) and therefore they must follow the agreement to a "T".

A word of caution
Not all states offer acceptance of restrictive endorsements and some collection agencies will cash your check and continue collecting the debt. To avoid this pitfall, be sure to read your state and the creditors state UCC code to see what their rule is on "Negotiable Instruments". If they allow it then you are good to go however if they do not then there is no guarantee it will work. Also be sure to read through terms and disclosures if you are attempting to use one with an original creditor because many of them now add a section in their disclosures that they do not accept reduced payoffs with restricted endorsements and you have no rights to do so. Be careful!

The Restricted Endorsement
Normally you add a section of fine print to the back of the check stating "Cashing of this check constitutes your acceptance of my restricted offer. Any and all future claims for this debt are null". You can also add a notation on the front that says "restricted endorsement: cashing constitutes agreement". Don't send these types of offers to lockboxes because it will never be seen. That is why it is very important to send the offer first then follow up about 20 days later with the payoff. This way, the collection agency or creditor had plenty of time to reply to the offer with a yea or nay.

Do I look for it under state statute or UCC codes?
A restrictive endorsement will usually be found under your state's ucc codes. It is a "negotiable instrument" therefore when you are searching state codes to see the rule on if your state will take it or not, be sure to look at that state's UCC code rather than their civil codes. It does depend on the state so you may have to find both the civil text and UCC to know for sure. But, on average all restrictive endorsement language will be under "negotiable instruments" of the UCC code. Here is an example of the Nevada UCC rule on Restrictive Endorsements;

NRS 104.3206 Restrictive endorsement.
1. An endorsement limiting payment to a particular person or otherwise prohibiting further transfer or negotiation of the instrument is not effective to prevent further transfer or negotiation of the instrument.

2. An endorsement stating a condition to the right of the endorsee to receive payment does not affect the right of the endorsee to enforce the instrument. A person paying the instrument or taking it for value or collection may disregard the condition, and the rights and liabilities of that person are not affected by whether the condition has been fulfilled.

3. If an instrument bears an endorsement described in subsection 2 of NRS 104.4201 or in blank or to a particular bank using the words “for deposit,” “for collection,” or other words indicating a purpose of having the instrument collected by a bank for the endorser or for a particular account, the following rules apply:

(a) A person, other than a bank, who purchases the instrument when so endorsed converts the instrument unless the amount paid for the instrument is received by the endorser or applied consistently with the endorsement.

(b) A depositary bank that purchases the instrument or takes it for collection when so endorsed converts the instrument unless the amount paid by the bank with respect to the instrument is received by the endorser or applied consistently with the endorsement.

(c) A payor bank that is also the depositary bank or that takes the instrument for immediate payment over the counter from a person other than a collecting bank converts the instrument unless the proceeds of the instrument are received by the endorser or applied consistently with the endorsement.

(d) Except as otherwise provided in paragraph (c), a payor bank or intermediary bank may disregard the endorsement and is not liable if the proceeds of the instrument are not received by the endorser or applied consistently with the endorsement.

4. Except for an endorsement covered by subsection 3, if an instrument bears an endorsement using words to the effect that payment is to be made to the endorsee as agent, trustee or other fiduciary for the benefit of the endorser or another person, the following rules apply:

(a) Unless there is notice of breach of fiduciary duty as provided in NRS 104.3307, a person who purchases the instrument from the endorsee or takes the instrument from the endorsee for collection or payment may pay the proceeds of payment or the value given for the instrument to the endorsee without regard to whether the endorsee violates a fiduciary duty to the endorser.

(b) A subsequent transferee of the instrument or person who pays the instrument is neither given notice nor otherwise affected by the restriction in the endorsement unless the transferee or payor knows that the fiduciary dealt with the instrument or its proceeds in breach of fiduciary duty.

5. The presence of an instrument of an endorsement to which this section applies does not prevent a purchaser of the instrument from becoming a holder in due course of the instrument unless the purchaser is a converter under subsection 3 or has notice or knowledge of breach of fiduciary duty as stated in subsection 4.

6. In an action to enforce the obligation of a party to pay the instrument, the obligor has a defense if payment would violate an endorsement to which this section applies and the payment is not permitted by this section.

(Added to NRS by 1965, 823; A 1993, 1269)—(Substituted in revision for NRS 104.3205)

Points to remember:
You should always push for a Paid as Agreed Rating. Your final goal in negotiating your credit rating is to get the creditor to list your credit rating after the settlement as "Paid as Agreed" or "Account Closed - Paid as Agreed". Anything other than this listing will have a negative effect on your credit report. Creditors make their profits by collecting from their customers, not by reporting negative credit information. Because creditors realize this, they will often agree to delete any negative listing upon settlement of the debt. You have to realize that creditors won't try to ruin your credit rating as a personal vendetta. It's strictly business. If it pays to collect from you and restore your rating to perfect, they will do this. Talk to them in terms of money, not principals or morals. Something along the line of "I know you would love to receive the $3,000 I owe you, but it will not help my credit report if you can't change my rating to 'Paid as Agreed'. All I have is $3000 and I will pay it to other creditors who will agree to change my credit rating in writing."

Collection agencies will always agree more readily to delete the negative listing than banks or credit cards. Why? They can change their rating, no problem, but you are still probably stuck with the original creditor reporting you late. And who cares if you have a "Paid As Agreed" collection account: no matter what the rating, every collection account is a negative mark. It's no skin off their nose to change it, and of no use to your credit. You need to get the collection agency to agree to remove their listing entirely from your report and have the original creditor change the rating to "Paid As Agreed". At the very minimum, you are within your legal rights to demand the removal of the collection account from your report.

Some collection agencies will tell you they have no power over what the original creditor will do regarding your credit. To some extent, this is true. However, both the collection agency and the creditor want their money. If collection agency gets paid, so does the creditor, therefore it is to their advantage to cooperate. And baloney if they tell you they don't know how to get a hold of the original creditor: did the account magically appear on the collector's desk? No. The collection agency was hired. Explain to the collection agency if they can get a written agreement from the creditor, you will pay them their money, or you will pay a more cooperative creditor with the only money you have left, and they get nothing.

Remember, though, not all collections result from credit cards. Doctor's bills cannot appear on your report. But collections resulting from these accounts can. In the case of such collections, there is no duplicate negative listing, since the original creditor is not allowed to put a listing on your account, so this collection may legally remain on your report. Many creditors, though, have an agreement with the credit bureaus that they will not allow a negative listing to be deleted upon settlement. While this is true, the creditor can just tell the credit bureau that they reported your rating inaccurately, not that it was due to settlement. Anything a creditor reports, a creditor can change. If this wasn't the case, creditors couldn't change erroneous information they may have placed on your account by mistake, and find themselves in trouble with the FTC.

In most credit organizations, there are dozens of people with the authority to make changes on the credit report. Larger creditors, such as huge credit cards or banks will require more pressure before they will agree to delete a negative listing, but virtually every creditor will acquiesce with the right amount of persuasion.

If you have to accept an imperfect credit listing as part of your settlement. You may find that some of your creditors are willing to hold out longer than you are before agreeing to delete the negative listing from your file. It may seem that they are unwilling to delete the negative listing under any circumstance. Once again, let it be said that every creditor will eventually give you what you want if you speak to the right person, are patient and persistent, and make the right offer. But if you are on a time-line, and your attorney can't get them to agree to full deletion, you have a couple of other options:

List the account as "Paid" only. You may counter-offer that the creditor list the account as "Paid" rather than delete it altogether. This is a true indication of the status of the account and many creditors will concede and agree to this wording. A "Paid" status is still very negative for a collection account or an account that will show "Paid Charge-off" or "Paid Repossession." You should insist that the account show "Paid" only and that all other negative notations (such as "Charge-off," "Repossession," late notations, or "Collection") are deleted at the same time. A simple "Paid" notation on a regular trade line is neutral and should not hurt your credit.

List the account as "Settled" only. You may counteroffer that the creditor simply list the account as "Settled" rather than delete it altogether. "Settled" is an inherently negative listing but not as negative as "Paid Charge-off." Don't agree to a "Settled" listing until you have exhausted all other possibilities. "Settled" will still trigger a credit denial. You should only agree that the account show "Settled" if all other negative notations (such as "Charge-off", "Repossession", late notations, and "Collection") are deleted at the same time. If you agree to a "Settled" notation, you must continue to work hard to delete the notation through the credit bureau dispute process.

List the account as "Paid Charge-off" or "Paid Collection" or "Paid was 30-, 60-, or 90-days late." This will be the creditor's first choice, and your last choice, of what to place on your credit report once you have paid. These notations are almost as damaging as showing the same debt unpaid. It is very common, though, for an account to be deleted (through credit bureau disputes) once it has been paid. The creditor now has no compelling reason to keep the negative listing on your report. For this reason, it is still usually a good idea to settle even if the creditor won't budge on deleting or positively modifying the negative listing.

You will most likely be able to find proof that the debt is unverifiable and not have to pay it at all.
Collection accounts are sold two and three times so odds are good that the records are missing. You owe it to yourself to totally understand and use Validation of Debt before settling any debts.

Finally, before sending any payment on a bad debt be sure to read our complete explanation on Accord and Satisfaction and look for a lot of resources online regarding this subject. Don't take ours or anyone else's word when considering this big financial decision. Be your own best investigator and use caution and common sense. Keep copies of everything and send all correspondence by certified mail- return receipt requested.

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