Does cashing a "paid in full" check settle the debt?

It can. Under UCC 3-311, if the borrower in good faith sent a check as full satisfaction of a claim that was genuinely disputed or uncertain in amount, the check or an accompanying note clearly said so, and the lender cashed it, the remaining claim is generally discharged.

What if the amount owed was not disputed?

The rule applies to claims that were unliquidated or subject to a bona fide dispute. A promissory note with a fixed, undisputed balance usually does not qualify, so cashing a partial payment generally just reduces the balance. If the borrower raised any real dispute, though, be careful.

Can I undo cashing a full-payment check?

Often. Under the UCC, the claim is generally not discharged if the person owed repays the amount of the check within 90 days after it was paid, The exception generally does not help a lender who knew before collecting the money that the check was offered as full payment. Act quickly and in writing.

The borrower sent a "paid in full" check for less than you are owed. Should you cash it?

An envelope arrives with a check for $3,000 on a $5,000 note, and on the memo line the borrower has written "paid in full." Depositing it feels like getting at least some of your money. Under the right conditions, it can also end your right to the other $2,000.

The rule: accord and satisfaction

When someone pays by check as full settlement of a debt, the Uniform Commercial Code section 3-311 governs. If the borrower shows that they tendered the check in good faith as full satisfaction, that the amount owed was unliquidated or subject to a bona fide dispute, and that the lender got the money, the rest of the claim is generally discharged, as long as the check or a written note with it clearly said it was full payment.

That's the deal the law calls accord and satisfaction. Depositing the check is treated as accepting the offer.

When it does not apply

The rule is aimed at disputed or uncertain debts. A promissory note with a fixed balance that nobody disputes usually doesn't qualify, and a partial check simply counts as a partial payment. The risk rises when the borrower has raised a real disagreement, such as about interest, fees, a missed credit, or the quality of something the loan paid for. That's when a full-payment check can do what it says.

Create a Promissory Note ($7.99) When a Borrower Stops Paying

The 90-day way out

Under section 3-311, a claim generally isn't discharged if the person owed repays the amount of the check within 90 days after it was paid. So if you deposited it without realizing it was sent as full payment, you can usually undo the settlement by sending the money back quickly, in writing, with a note that you reject the offer. That way out generally closes if you knew, before collecting the money, that the check was tendered as full satisfaction. Businesses that publish a dedicated address for disputed payments have their own rules under the same section.

Before you deposit

Read the check and everything that came with it. Look for "paid in full," "final payment," or "full settlement."
Ask whether the balance is disputed. If the borrower has argued about the amount, treat the check as a settlement offer.
Decide on purpose. If the amount is worth settling for, cashing it may be fine. If not, return the check with a short written rejection.
Don't rely on crossing out the words or writing "under protest." Those steps don't reliably preserve the claim.
Record what you do. See keeping a payment ledger.

If you settle on purpose

Accepting less can be a sensible end to a loan that would cost more to chase. Put it in a short written settlement that states the amount accepted and that the note is paid, and return or mark the original note. See modifying a note, writing off an unpaid note, and when a borrower stops paying.

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