Using
Restrictive Endorsements: Settling Bad Debts with Collection Agencies
Information on restricted endorsements and
UCC Codes on negotiable instruments
If you have received
a notice of a collection account or charged off debt from a collection
agency and are considering settling the debt for less than the full
amount, then you should read this. This information could be the
difference between saving thousands and owing thousands. Before
you do anything when it comes to a collection account, always
validate the debt,
check the statute of limitations and use restrictive
endorsements -- wherever and whenever possible.
Before we delve in
to the specifics of how a restrictive endorsement works, understand
that its not an automatic process nor is it a guaranteed one.
For instance, you can't
just send a check with a letter attached and assume you've created
an accord
and satisfaction. For the restrictive
check endorsement to work well, there must be a mutual decision
between the creditor/agency and the debtor. Most, if not all states
now have a Safe
Harbor under the UCC code for just such situations. The Safe
Harbor was basically created to protect creditors who may have
automated processing of checks and gives them the opportunity to
refund the check back to the debtor within 90 days of cashing it.
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 use VOD
as soon as you receive a collection notice 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 special care. 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, if possible.
Do I just avoid the
collection agency?
No. 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
VOD request to the collection agency 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.
Upon finalizing the
VOD 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 VOD 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 terms.
A word of cautionabout restrictive endorsements
As mentioned above, 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
A restrictive endorsement is usually a matter of purely money. If
I create a check with a restrictive endorsement and you cash it,
you have created an execution of that endorsement which basically
means you agreed to my terms. This is not a sure thing however,
because of course, state laws apply. Not every state honors RE's.
Be sure to check state statutes and
state UCC codes. Safe
Harbor is in place to protect creditors and if the safe harbor
rule applies in your state then negotiations can fall through.
Most commonly, a restrictive
endorsement is used to settle a debt and satisfy not only the other
party, but to protect yourself from future collections. A RE can
also mean pretty benign actions like "for deposit only"
meaning the check is to be deposited, not cashed out. In terms of
collectors, many people use a RE to settle a debt. They may have
attached a settlement letter to the check and sent them both in
one envelope to the creditor. Dont be fooled into thinking that
the creditor has to follow the requirements of the letter in order
to cash your check. If there are no RE terms on the actual check,
then there are ways around the clause by the creditor. He can still
cash your check and trash your letter.
So how do you protect
yourself? Well, outside of state laws that dont honor them, you
have to put the RE on the actual check. This will prove that the
creditor saw the terms and cashed the check. Cashing of the check
would obviously mean they agree. An endorsement on a check with
restrictions has been created. An endorsement is a signature on
the back of a check stating that the payee has consented to receive
the funds from the payer. A restrictive endorsement states the circumstances
under which the payee will accept the funds under the signature.
It's a smart idea to
work out the terms of the RE before you send it to ensure
the creditor agrees. Take note of who you are sending it to and
their physical location. You wouldn't want to send a RE to a lockbox
or payment processing center where they dont read letters. The creditor
could use that defense claiming that technically nobody saw your
agreement because they only process payments at that location. A
physical location with a person's name (manager, supervisor etc.)
would be ideal.
It's also a good idea to clearly check the
contract you signed with the creditor. Some of them have disclosed
in it that they do not honor restrictive endorsements. In that situation
you would need to have their approval of your settlement/payment
in writing before issuing payment. Some states allow a creditor
to cross out the RE and cash it "under protest" so you
need to tread carefully when dealing with these types of settlements.
It's very practical to get dialogue going with the creditor before
hand to ensure success.
Why would a creditor or debt collector consider
accepting a restrictive check endorsement?
Simply put, money. It's harder than ever to collect debts in an
economy that's been hit hard since 2007. Collection
agencies as well as creditors know that collecting money is
their biggest priority but also their biggest obstacle. Because
of the downturn in the nation's economic position in the last few
years, more and more bill collectors and original creditors are
willing to settle debts and negotiate payoffs with debtors. Some
money is better than no money and lawsuit filings are time consuming
and expensive to process. For that reason, a collection agency may
be more than happy to be dealing with a debtor who's willing to
pay - especially when so many are hiding from them.
Benefits of a well meaning legal agreementlike an Accord and Satisfaction
A well thought out special endorsement can be a very beneficial
thing for you and your finances. If the creditor agrees to accept
a reduced portion as the full and final balance, then not only have
you saved money, perhaps a lot, but you've created a document
that you can use as proof to better your credit history with
that debt. If in your restrictive agreement you required the creditor
to either delete the account (collection agencies do this - not
original creditors) or report it as settled then you've just
rid yourself of a very negative "charge off" or "collection
account" in your credit reports. Special endorsements on
checks can be a powerful tool if done right. You may be able to
stop a lawsuit, pay way less money and improve
your credit by having a successful restrictive endorsement.
Not sure how to
write collection or credit letters?
Our credit & collection letters
cover issues from the credit bureaus all the way down to the collection
agency, and you can get them free.
Using
Restrictive Endorsements: Settling Bad Debts with Collection Agencies
