Can you simply write “paid in full” on the memo line of a check to discharge a $1,000 debt for $10? It would be a wonderful world if it was just that simple. We all have heard the urban legend that if a debtor write paid in full on the memo line and the debtee cash the check, then the debtor is totally discharge of the debt. Unfortunately the law does not allow for this however, like most urban legends there is some truth to this notion.
Section 3-311 of the Uniform Commercial Code states that a debt can be discharged with a check designated as payment in full, if a person against whom a claim is asserted proves that (i) that person in good faith tendered an instrument to the claimant as full satisfaction of the claim, (ii) the amount of the claim was unliquidated or subject to a bona fide dispute, and (iii) the claimant obtained payment of the instrument.
The key to UCC Section 3-311 is there must be a bona fide dispute between the debtor and the creditor. This can be a dispute to how much is owed or even if anything is owed at all. In order to prove this in court, you should send a letter to the creditor disputing their claim. If they respond to your letter then you should send another letter reiterating your position that you are disputing the claim. If you don’t receive a response, after 30 days you should send another letter demanding that they make the appropriate corrections to your account. Keep copies of the letters and I would suggest sending them certified mail return receipt.
After sending the last letter, wait two to three months and write a letter and send it with your final payment. In the memo area on your check, write something to the effect that this is a “full and final payment” or “satisfaction in full”. In the accompanying letter, you should reiterate that the enclosed check is being tendered as a complete satisfaction of any dispute or controversy existing between you and them, and that their depositing the check constitutes their agreement that the amount paid is a complete satisfaction of any dispute or controversy. DO NOT send this letter and check by certified mail because you do not want to bring to much attention and concern to this payment. Most companies will just deposit the check when it is received.
Also, Uniform Commercial Code Section 3-311 states that person in good faith tendered a check. If you the debtee is claiming you owe $5,000 and you claim you owe $1,000 then you cannot send a check for $10. In this situation there is no way of knowing what a particular court would consider to be good faith but in my opinion anything over $700 would be o.k.
Finally thought, Keep in mind after this is done most companies will continue to contact you demanding payment and some will report you as delinquent to the credit reporting bureaus but if they every attempt to sue you, you will definitely have a good defense.