Bad Checks - What to Do About Them?

Bad Checks. What to Do About Them

Why did the check bounce? Most often, it is because of a mistake by your customer. On rare occasions, it is the result of the bank's mistake. With a few simple steps, you can minimize the incidents and impact of NSF (non-sufficient funds) checks and associated "bad check" fees from your bank.

The following information should be considered as you look at your company's policies regarding the receipt and cashing of checks:

  • 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 your check will clear. 
  • Anticipate NSF Checks. You will have customers at times who 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 markings 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, your customer's account balance may increase or decrease by the time you deposit the check.

Many states have laws that impose serious penalties for 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 recover money from a bad check through a civil proceeding (a lawsuit). Criminal prosecution is most likely when a check fails to clear after a COD (cash on delivery). 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 the 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 post-dated check, the exchange isn't considered "contemporaneous" and, therefore, won't be prosecuted. You may still sue in civil court 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 that you will 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!