Home> Credit Library

Restricting terms in settling bad debts
We have many articles on this issue so be sure to research our credit library. Before using a restrictive endorsement agreement, check with your State Attorney General, or a local attorney to see if this type of agreement is binding in your state and county. State laws vary. If you have an old debt or a charged off debt being pursued, the biggest mistake you may ever make is simply paying it!

The reason is because once the debt is delinquent or written off, it has already landed on your credit reports in a very negative way. By paying it after the fact, the creditor/collector will get his money but you will still end up with a 'paid charge off" on your credit reports. The older the debt is the better your chance to settle the debt for way less and for an improved rating on your credit reports. This is because the debt has already been considered uncollectable and the creditor figures you may file bankruptcy or simply never pay. This puts you in a very favorable position to negotiate.

What is a Restrictive Endorsement
When a creditor accepts payment with a restrictive endorsement, a legal agreement is binding your creditor to the terms specified on the payment instrument. Why use a restrictive endorsement agreement? Most creditors are happy to receive any form of payment; after all, this is why they are in business. To understand why this method works so well, put yourself in the position of a collection agency or creditor who received payment with a restrictive endorsement. First, you may be a position to receive a commission for the recovered funds. Second, you may feel no obligation to follow through with the terms in the letter. Odds are, your payment will be accepted without any reservations. In some states, a restrictive endorsement may not hold up. I.E. creditor had the right to full funds and was cashing the payment that you owed. It is always best to send the agreement first, give the creditor time to object and then send your payment with a copy of the first letter. Do not send payments to lock boxes. Those will be processed as usual. Send it directly to the credit manager.

When to use a restrictive endorsement agreement?
As a general rule, mortgage lenders will not honor this form of payment nor will most creditors for secured debts where there is collateral involved. Unsecured debts are usually the target. This method is generally most effective with older accounts that have been turned over to collections. It will work however, with newer accounts if the collector "perceives" the account may be difficult to recover.

Collection agencies only profit if they have successfully collected funds for their client. If your account has already been turned over for collections, the original creditor was unsuccessful after sending a series of demand letters. In most cases, if the account is older than one year, your creditor "wrote" off the balance as bad debt and reported your debt as a financial loss. In this scenario, a restrictive endorsement is recommended. Your creditor has lost all hopes of keeping you as a customer and any funds they collect at this stage are considered a different kettle of fish.

The FOLLOWING VERBIAGE MUST BE WRITTEN ON THE ACTUAL PAYMENT INSTRUMENT. Even if you shorten it, make sure the necessary wording of settlement and restrictive are on the back of the check above where the person would endorse it. We recommend a Cashiers Check from your local bank or credit union...as you can have them copy the check after it has been processed and returned to the bank. Keep a copy!!!!

By sending a check with this verbiage, you are offering in no uncertain terms to settle the debt and be done with it permanently. If the creditor cashes the check knowing it has a restrictive endorsement on the back, they have to abide by terms. Some creditors may write on the back 'Cashed under protest" so that they can continue to collect the balance.

To avoid this, make sure you send an offer in compromise letter first and once they agree in writing, you send this letter above. We don't recommend that you arbitrarily send a check like this until you have gotten the creditor to agree prior. Doing so may jeopardize your position.

Some courts see a restrictive offer as nothing more than paying part of a debt you owe while other courts consider for a restrictive offer to be enforceable, there must be an offer, an acceptance of that offer, and some consideration. In the settlement of a legal dispute, the agreement to settle is called an "accord." Actual exchange of the consideration is called a "satisfaction." Thus, Accord & Satisfaction.

Finally always be sure you are cautious when dealing with collection agencies. You should verify the negative item to the credit bureaus first and if verified as accurate then request a VOD. However don't ignore any collection notice you receive because by law you have 30 days to lodge your dispute with the collection agency. You will want to send your VOD ASAP in that scenario. Once you have determined that the debt is absolutely legitimate then you can begin to negotiate using restrictive endorsements to create a new accord and satisfaction. This method is extremely powerful.