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Paid in Full

Claim:   A debtor can discharge his obligations by sending his creditor a check made out for a fraction of the amount owed with the words 'Paid in full' written on it.

MIXTURE

Example:   [Los Angeles Times, 2002]

A friend of a friend has racked up credit card debt and student loans totaling $100,000. Not securely employed, she has been planning on continuing her dinners out, lavish shopping trips, a car purchase and vacations, figuring it all will get wiped out soon enough.

She says she is working with a lawyer who advised her to write $10 checks to all her creditors, with a note saying "paid in full" on the check.
 

Origins:   "Get rich quick" (or, in this case, "get poor more slowly") schemes never seem to lose their appeal, even though common sense should warn that if getting rich quickly were truly so easy, everyone would be
wealthy.

Obviously, if getting out of a debt were as simple a matter as executing the method described above, no one would ever lend money or extend credit. Nonetheless, these schemes maintain their hold on the public because people are willing to entertain the fiction that they're a form of "secret knowledge" — that such loopholes do exist because only a select few are smart enough to know about and take advantage of them.

It's not uncommon for creditors to agree to settle debts for less than the full amount due. After all, some payment is better than none, and if debtors can be encouraged to pay at least a portion of their debts back through promises that they will relieved of any further financial obligations towards their creditors, then both sides come out ahead. Better to accept a fraction of what you're owed than to risk your debtor's declaring bankruptcy or choosing to pay off other debts instead, leaving you with nothing.

For such arrangements to be valid, however, both sides must agree to them. A debtor cannot unilaterally declare a partial payment to be "payment in full" simply by attaching a note with those words to his check or writing them in the memo field and assuming that if the creditor fails to notice the notation then the entire debt has been discharged:
This "paid-in-full" nonsense has achieved the status of urban legend, says J. Scott Bovitz, a Los Angeles bankruptcy lawyer. A creditor sometimes will reduce a claim for a disputed payment, but this kind of settlement usually won't happen if the debtor acts in bad faith, Bovitz says. The act of writing "paid in full" on a $10 check pretty much defines the term "bad faith."
Section 3-311 of the Uniform Commercial Code does state that a debt can be discharged with a check designated as payment in full "if the person against whom the claim is asserted proves that the instrument or an accompanying written communication contained a conspicuous statement to the effect that the instrument was tendered as full satisfaction of the claim." However, it's up to the claimant to prove "that within a reasonable time before collection of the instrument was initiated, the claimant, or an agent of the claimant having direct responsibility with respect to the disputed obligation, knew that the instrument was tendered in full satisfaction of the claim." So if you receive a check marked "paid in full" made out for less than the amount you have agreed upon, you'd best not cross out the words "paid in full" or write "disputed" on it and cash it anyway, as you risk having the entire debt discharged. However, this condition does not apply to "transactions conducted or performed, in whole or in part, by electronic means or electronic records, in which the acts or records of one or both parties are not reviewed by an individual in the ordinary course [of business]," which means that this scheme will not work at all for most bill or credit card payments, as those payments are typically handled by automated systems and not humans.

The best method for paying off debts with small payments remains not to run up large debts in the first place.

Last updated:   18 April 2011

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Sources:

    Weston, Liz Pulliam.   "Money Talk."
    Los Angeles Times.   3 March 2002   (p. C3).