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NSF (Insufficient funds), Closed Accounts, and Other BAD CHECK ISSUES!

Posted by attorney Steven Harms

Why did the check bounce? Most often it's because of a mistake by your customer. On rare occasions, it's the result of the bank's mistake. With a few simple steps you can minimize the incidence and impact of NSF checks, and an associated "bad check" fee from your bank:

* Deposit checks as soon as they arrive: If your customer has numerous outstanding checks, as is usually the case, being the first creditor to the bank makes it more likely that your check will clear.

* Anticipate NSF checks: You'll have customers who at times submit bad checks. You need to be proactive. Maintain sufficient balances in your accounts, and arrange for overdraft protection so when you unknowingly deposit a check that your customer doesn't have the funds to cover, you don't end up bouncing your own checks.

* Know your customer: Is your customer careless with accounts and payments, or is your customer experiencing cash-flow problems? Ideally you can anticipate whether you can safely redeposit the check or ask for a new check to be issued, or whether you should regard the NSF check as a pressing matter for collection.

When a check you deposit doesn't clear, your bank will return the check to you. (It will have a number of marking on the front and back, indicating when and where it was processed by the banks involved and that it was rejected due to there being insufficient funds in the account at the time the check cleared.) If the customer doesn't immediately offer to replace the NSF check with a cashier's check, deposit the same check a second time. The second time may be the charm, and it just may clear. You can try to hedge your bet by calling the customer's bank to see if it will confirm the presence of enough funds in the account for the check to clear, but remember that your customer's account balance may increase or decrease by the time you deposit the check.

Monitor the second deposit, and if it fails to clear the second time, declare war. Your relationship with your customer has broken down, and it's time for aggressive collection action. Send your customer a letter demanding that the NSF check be paid immediately.

Many states have laws that impose serious penalties on the act of writing NSF checks. Some of these laws are criminal, and you can call the police upon receiving an NSF check. You can also contact the district attorney's office for the county where you received the check, and they'll usually be able to tell both the laws for your state and their policies for prosecuting bad check cases.

Depending upon your state laws you may have to try to recover money from a bad check through civil proceedings (a lawsuit). Criminal prosecution is most likely when a check fails to clear after a COD (cash on delivery) order. When you contact the police, refer to this as a "contemporaneous exchange of value and intent to defraud." The exchange is contemporaneous because you didn't extend credit terms and the customer was supposed to pay you at the time of delivery. Intent to defraud is presumed because the customer didn't put enough money in the account to cover the payment. If you accept payment on account or take a postdated check, the exchange isn't considered "contemporaneous" and therefore won't be prosecuted.

You may still sue in civil court to try to recover the funds.

Theft by check may be a misdemeanor or even a felony under your state's laws, but that doesn't guarantee you'll see your money. If the offender is put in jail, it may become even harder to recover the funds from the NSF check. How ironic.

For the police to even look at a case where you received an NSF check, there must have been no agreement by you to hold the check for a period of time. What if your state doesn't have a criminal statute, or the police tell you that it's a civil matter that you have to resolve on your own? You use a form letter that reflects your state's civil laws and penalties for collection of NSF checks. These penalties vary widely by state, so you need to adapt your form letter to match your state's laws.

In addition to recovering the face value of the check, many states permit you to recover a civil penalty from a customer who issues a bad check. State civil laws allow you to sue the customer for additional sums of money, such as two or three times the amount of the check.

All communications to consumer debtors should include a statement that "This letter is an attempt to collect the debt, and any information obtained will be used for that purpose." This ensures compliance with federal law 15 USC 1692e(11). When this warning is required but you fail to include it, its omission provides the debtor with grounds to recover money damages from you, even if you do everything else right.

Uncollected funds occur when your customer has deposited a check, possibly from one of its own customers, that fails to clear the bank, which results in your check bouncing. In other words, your customer has a check in its account that should cover the amount of the check it sent to you, but it doesn't. A domino effect occurs: One bad check begets another.

When a check is returned, stamped "uncollected funds," typically the situation isn't as serious as with nonsufficient funds or account-closed payments. Most often, this problem results from your customer's bad bookkeeping. Good intentions or bad, you still need to get paid. If you're unable to reach your customer or arrange for prompt alternative payment, deposit the check a second time. If it again doesn't clear, let your customer know that you intend to send a courier over that afternoon to pick up replacement funds.

When a customer stops payment on a check, you know that the customer intended that the check be dishonored. Most often your customer will stop payment over a dispute with you, and it doesn't want to pay until the dispute is resolved. Some customers stop payment as an aggressive means of canceling an order that has already shipped or been delivered. Often the first notice you receive of a customer's dispute or change of heart is the check being dishonored by the bank.

The law treats stop-payment orders differently than nonsufficient funds or account-closed checks. Although you're insulted that your customer placed the stop-payment order, a court may see that action as justified. Preventing stop-payment checks is difficult. The most obvious solution is to insist on cash, money order, or a cashier's check. Although it's technically possible to stop payment on a cashier's check, it's very unusual for that to happen.

Your customer's bank account has been closed, so the check you deposit from him won't clear. The returned check will typically be marked "Account Closed" or "Refer to Maker". Your initial reaction may be that your customer was malicious (yes, filled with bad intentions) because . . . well . . . who wouldn't know their account was closed when the check was written? Hmm. But perhaps the customer had a good reason to close the account, or its bank closed it over an infraction or dispute after the customer issued the check.

This is a context where it's good business to assume bad intent. Some of the most creative stories a collector hears come from customers embarrassed by bouncing checks who, when contacted, create fairy tales about why the check didn't clear or why the account was closed (count the number of times you hear, "It was my bank's fault").

You should take aggressive action to collect account-closed checks. As with customers who have issued NSF checks, instruct everybody in your company who interacts with the bad-check-writer that this customer can't be trusted and must be placed on cash-only terms. If you have given the customer credit terms, cut them off from further credit right now: Put this book down and go do it (then pick the book up again!). Then call your customer and let him know when your courier will be stopping by for payment.

This is not intended to be legal advice, but is rather general information to give you some still need to consult with counsel (an attorney) in your area, state, concerning any issues you have.

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