dangers of indorsing a check

What I learned in class today:

Let's say you get a check from someone, which says "Pay to the order of John Smith" in the amount of $500.00. In theory, John Smith should be able to sign the back of the check, take it to the bank and cash it or deposit it into his account without any worries. Yes, that's the theory.

But what if John Smith was on his way to the bank with his paycheck that he just signed and dropped it on the street. Should he worry that no one else will be able to take his money? Should he worry that he can get another check from work if he told them he lost it?

Yes he should worry. If John Smith just signed "John Smith" on the back of that paycheck, he just turned that piece of paper into "bearer paper," which means that the "bearer" of the check is the new holder of the check and thus can cash the check without question. Thus, Jane Doe can pick up John Smith's paycheck and as the new holder of his paycheck, she can cash it at a bank for $500.

Next scenario: Suppose John Smith signs the back of the paycheck "John Smith" and then gives the paycheck to a check cashing place in exchange for immediate cash of $500, then the check cashing place rubber stamps "Check Cashing Place" underneath John Smith's signature, does this protect the Check Cashing Place from losing money if it drops the check on the street where Jane Doe picks it up? Nope, for the same reason above. By rubber stamping "Check Cashing Place" underneath "John Smith", this is just saying that John Smith signed the check over to Check Cashing Place, and thus it is still "bearer paper" and the person who bears the paper is the holder who gets money.

So how should John Smith and Check Cashing Place protect themselves from the Jane Does of the world?

When signing the back of a check made payable to you, always put "For Deposit Only" underneath your signature. And if you want to be extra careful, put "for deposit only to account xxx" under your signature. This by law does not convert the check into "bearer paper" and the only holder of the check is the owner of the account the check is being deposited in.

Of course, if you want immediate cash, make sure you don't sign the check until you are physically in front of a bank teller or employee of a check cashing place. Because once they give you the cash, who cares if they're negligent in losing checks on the street.

Vocabulary lesson: You have to INDORSE the back of a check to get the funds; and you only ENDORSE a presidential candidate if you really really really believe all the lies he/she is telling.