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  • Writer's pictureSarah Morris Ocampo

Can a partial payment force a creditor to cease collection efforts or halt a lawsuit to collect a de

Credit can offer tremendous flexibility for businesses or individuals in managing their finances. Debts can also be incurred in other ways, such as those resulting from a judgment in a lawsuit.  Unfortunately, sometimes debts cannot be paid promptly and collection efforts will begin.

The debtor, or the person who owes the debt, may wish to end collection efforts or a lawsuit over the debt with a partial payment. Many creditors or lenders may agree to do that voluntarily when offered a partial payment and promises of the rest. However, the creditor generally cannot be forced to end collections or a lawsuit by anything short of a payment which brings the account current.

There are a couple of exceptions to that general rule. The debtor may offer a conditional payment in circumstances where accepting the payment would be accepting the conditions attached. This would modify the old contract and is sometimes referred to as a novation. However, this requires circumstances and facts for the payment that make it clear that the creditor and debtor are changing the agreement. Simply writing “paid in full” on a check is not sufficient to create a novation.

Under certain circumstances it is also possible for accepting a late payment to be a waiver of the right to strictly demand prompt payment. This generally requires that accepting the late payment be part of a long trend of accepting such payments or otherwise repeatedly waiving the right to demand timeliness. For instance, in one case in Nevada a life insurance company had repeatedly accepted late payments from Mr. McKeeman for his policy. Mr. McKeeman died prior to his bookkeeper sending in an overdue payment, which the insurance company cashed. After finding out that Mr. McKeeman was dead, the insurance company attempted to declare the policy cancelled. Even though the payment was sufficiently overdue that the grace period had expired, the Nevada Supreme Court found that the insurance company could not automatically void the policy based on that alone. But the Court emphasized the history of the insurance company repeatedly accepting payments past the grace period. There were at least three documented cases of the company accepting payments as timely after the grace period had expired and several more instances of payments being late but within the grace period. As shown in that case, an ongoing course of conduct can establish a waiver of some rights under a contract.

Generally, offering or accepting a partial payment on a debt does not necessarily halt collection efforts or litigation, but there are exceptions if it could form a new agreement or is part of an ongoing course of conduct.

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