If you owe a creditor $800, you might be tempted to send a check for $600 and write on the check “paid in full." While it’s not unusual for people who owe money to negotiate a debt down to a lesser amount—and while it’s possible to do so by writing “paid in full” on a check—it won’t work unless you follow additional rules.
Even then, the creditor can reverse course later and demand full payment. So, although you might initially be able to pay less than what you owe using this approach, you’ll have a better chance of enforcing your deal if you document it in a more traditional way, such as by creating a written agreement with the help of an attorney.
Paying Off a Debt for Less Than You Owe
Under what’s called “accord and satisfaction,” accepting a check under specific circumstances might result in a creditor losing the right to recover any remaining amounts owed. Almost all states have adopted laws that allow you to send partial payment as “payment in full,” even if the creditor hasn’t agreed to it, but only if the amount of the claim is uncertain or you have a good-faith dispute and you’re offering the check in good faith in full satisfaction of the claim.
This tactic is a way to resolve a disputed bill informally, not a way to pay pennies on the dollar for a debt you know you owe.
Factors You’ll Need to Meet
According to the Uniform Commercial Code (UCC), a set of model rules that many states choose to adopt, a “paid in full” check will only extinguish a debt if you meet the following factors:
- You and the creditor disagree about the claim amount or haven't finalized it.
- The paid-in-full statement is easy to see.
- You pay the amount in good faith.
- The creditor cashes the check.
You and the Creditor Disagree About the Claim Amount or Haven't Finalized It
If you try this approach on a credit card debt, it’s unlikely to work. Why? You probably won’t be able to show that the amount owed is uncertain. You’ll be held responsible for the amount you charged—a number that’s likely relatively simple to figure out.
On the other hand, if you’re working with a contractor and disagree about how many hours it took to finish a job or the supplies necessary to complete a project, you might be able to satisfy this requirement.
The Paid-In-Full Statement Must Be Conspicuous
Also, you can’t pull a fast one by writing paid in full somewhere the creditor wouldn’t expect to look. You must write it in a conspicuous place.
You might run into a problem if you send the check by electronic means.
You Must Pay the Amount in Good Faith
It’s important to understand that acting in good faith means conducting yourself reasonably. What constitutes reasonableness will be determined by the facts of the situation. For instance, a court is unlikely to find that you were acting in good faith if you try to settle a debt for $1,000 by paying $10 with a check marked “paid in full.”
The Check Must Be Cashed
Finally, the creditor must cash the check.
The Creditor Can Demand Full Payment Later
Even if the creditor cashes the check, you still might face a potential hiccup. The UCC gives the creditor 90 days to change their mind, return the funds, and demand the full amount.
The creditor can also instruct customers to mail all checks written for a lesser amount to a designated place. This provision allows the creditor to ensure that someone will look at it before cashing it.
Also, even after cashing the check, the creditor could still insist that you owe more money. You might receive collection calls, and your credit reports might not reflect that you’ve paid the debt.
In this situation, even if you’re in the right, you might have to get a lawyer to enforce the law. For this reason, it’s a good idea to try to work out an agreement with the creditor before you send any payment.
Agreeing to a Mutual Settlement
Again, it's wise to consider seeking an agreement with the creditor before sending any payment. Because writing "paid in full" on a check isn’t foolproof, consider negotiating with a creditor to reach an agreement you can both accept. Not only will this method bring the matter to a more certain conclusion, but it’s more likely that the creditor will follow through on the settlement.
If you decide to use this route, you’ll have a variety of options. For instance, depending on your comfort level, you can:
- work with the creditor directly or
- retain an attorney to negotiate on your behalf.
Once you reach an agreement, you’ll want to put the terms in writing and have each party sign it. If this isn’t possible, it’s a good idea to document your deal by sending the creditor a letter summarizing the settlement.
Talk to a Lawyer About Reducing a Debt You Owe
If you need help settling your debts, consider hiring a debt relief lawyer. An attorney can review all of your options and advise you on your circumstances. The lawyer can help you determine whether you should attempt to negotiate your debts or if you should do something else, like file for bankruptcy. If a creditor initiates a lawsuit against you for a debt, a lawyer can defend you.
However, you shouldn't hire a for-profit debt settlement company or another scammer debt relief company.