Legal Definitions - payment in due course

Definition: Payment in due course refers to the payment made by a debtor on a negotiable instrument, even if it is made after the maturity date of the instrument. This payment discharges the instrument. The holder of the instrument, known as a holder in due course, must have taken the instrument in good faith, for value, and without notice of any legal claims against it.

Example: John owes $500 to his friend, Sarah. He writes a check to Sarah for the amount on the due date. Even though the check is post-dated, Sarah can still deposit it and receive payment in due course. If John had stopped payment on the check before the due date, Sarah would not have been able to receive payment in due course.

Explanation: This example illustrates payment in due course because Sarah received payment on a negotiable instrument (the check) even though it was post-dated. Since Sarah took the check in good faith, for value, and without notice of any legal claims against it, she is considered a holder in due course and the payment discharges the instrument.