Return To Sender?

Playing By the Rules

What if you accidentally cash a check marked "payment in full"? Under the new law, you have 90 days to repay the debtor. Then you can pursue full payment as before. That won't work, however, if the debtor can prove that within a reasonable amount of time before receiving the check, you or whomever is responsible for your accounts receivable knew about the dispute and that a check intended to satisfy the debt in full was on its way. In that case, you can't really claim that cashing the check was an accident.

But suppose you have a retail business and hundreds of checks arrive every day. Although your accounts receivable department should be comparing each check to the amount owed, it's easy to let one marked "payment in full" slip by, even if it's not for the full amount. Given the volume of checks you receive, you may not discover the discrepancy until the 90-day period for repayment has passed. Or suppose you have a lock-box arrangement where the bank deposits checks directly, so no one in your company would have the opportunity to notice the discrepancy. The law allows you to avoid this scenario by conspicuously stating on your invoice that in the event of a dispute, the check should be sent to a specific person or office rather than the normal one. If the check--even for full payment--is not sent to the designated place, it won't count toward discharging the debt. That way, you have someone on the lookout for letters and checks that require special handling.

Can the debtor use this new law to get away with partial payment just as a means to save money? No, because the step must be taken in good faith. Suppose there was a clear agreement that you would pay $4,000 for the 10 cases of widgets, and when they arrived, they met specifications. You can't just send a check for $500, mark it "payment in full" and expect to get away with it. There has to be a bona fide reason for making the lower offer, such as a defect in the goods or your own financial straits.

If you're the creditor, receiving a "payment in full" check that isn't for the full amount can not only put you in an uncomfortable position but one that requires careful thinking. "Creditors can no longer accept full payment checks and anticipate bringing collection action for the remaining amount due," Campbell says. "Instead, they must carefully consider the ramifications of endorsing such a check, even under protest."

Under these circumstances, is this the best you can expect? Is it worth the time and expense to return the check and pursue collection, knowing you may end up with even less money? Remember, you have the power to choose who you will and will not do business with in the future. Sometimes it's just as well to cash the check, discharge the debt and get on with your work.

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This article was originally published in the April 1999 print edition of Entrepreneur with the headline: Return To Sender?.

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