Restrictive Endorsements (Examples & Definition) 

  • Restrictive Endorsements via endorsement of a check
  • Accord and Satisfaction - how it creates an agreement
  • Safe Harbor - The creditor's protection from settlements

UCC Codes

A restrictive endorsement is a way of paying an account in a strategic way to improve your credit rating. If you have received a notice of a collection account or charged off bad debt from a collection agency and are considering settling the debt for less than the full amount, then you should read this article about restrictive endorsements.  This information could be the difference between saving thousands and owing thousands of dollars.

Before you do anything when it comes to a collection account or bad debt, 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. 

Bad 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 validation of debt 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 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 caution

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!

Defining the restrictive 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 agreement like 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.