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USING RESTRICTIVE ENDORSEMENTS TO SETTLE BAD 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 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.

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. Read more about VODs here>.

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 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?

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