How To Handle Bounced Checks As a Small Business Owner

BY: ON SUNDAY, NOVEMBER 28, 2010

How to Handle Bounced Checks as a Small Business Owner

Almost every small business owner has run across the unfortunate or unscrupulous character who has written them a bad check as payment. Many small business owners regard a bounced check as an immediate loss and never move towards recuperating the money owed to them. Whether done intentionally or not, a bounced check comes with consequences and there are legal recourses in place to protect business owners from consumer abuses.

For the check writer a bounced check can actually result in criminal charges and jail time, depending on the value of the check and specific state laws. All states have criminal penalties for purposely writing bad checks. Some states, including Texas, Kentucky and Oklahoma, have no civil penalties for bouncing a check. The difference between civil and criminal penalties depends on whether the bad check was written intentionally and the amount of money due.  

While writing a bad check cannot affect an individual’s credit score, banks employ databases that specialize in tracking risky banking customers. Activity like repeated missed payments, bounced checks and negative balance on an account can result in being recorded in these databases. Being in these databases can cause banks to deny someone attempting to open a checking account.

The banking industry uses the term non-sufficient funds (or NSF) to define a request for payment that cannot be honored because the amount on the check exceeds the balance in the account. As a business owner you can take all reasonable precautions and still have a customer’s check returned to you by the bank with an NSF notice.

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Six Steps to Collecting Payment on a Bad Check


1. The first step to collecting on a bad check is simply calling the customer. Often times the situation ends there and the customer comes in embarrassed and apologetic to pay you in cash. This is why it is always a good idea to ask for a customer’s phone number while accepting payment. Be careful how you approach contacting your customer as there are specific regulations in place under the Fair Debt Collections Practices Act. To avoid any legal penalties make sure that you are acting within the legal limits of debt collection when contacting your customer.

2. For documentation purposes follow your phone call with an official letter clearly stating who you are, the name of the debtor, the service or product provided and the amount owed. Presenting the customer with a notice is necessary before you can move forward with prosecution if the customer refuses to pay.

3. Contact the customer’s bank to verify that they have an active checking account. Check in several times for two weeks in case the customer deposits a paycheck and your check becomes payable. Enforced collection is a service offered by banks where the next deposited amount in the account is automatically put towards paying off due bills or bad checks. Ask your customers’ bank if they offer enforced collection.

4. Purposely writing bad checks is a crime. If you have called the debtor and sent them a written notice that their check has bounced you can begin the process of prosecution.  Using a personal lawyer or the district attorney’s office to pursue a claim can be expensive and may not be worth it depending on the amount you are owed. Evaluate your options and make sure prosecution is worth it. Often times you can receive more than the amount owed to cover your legal costs.

5. Using small claims court to pursue payment is an option if the amount you are owed is within specific State limits. Most states have a range of $2,000 to $5,000 for small claims. If you’ve followed the proper procedures you may be entitled to two or three times the amount you are owed plus the costs for pursuing your claim.

6. Having a debt collection agency handle the process for you is also an option to consider. Though they will take a cut of your check as payment they have more experience in successfully recuperating unpaid debts. Make sure that the collection agency you hire works within the regulations of the FDCPA. You can experience severe repercussions if the agency you hire does not operate within the law. Understand that this agency you hire is effectively representing you and their behavior reflects on you and your business.

Recuperating payment from a bad check might seem like a daunting task but you didn’t open a business to work for free! Not pursuing payment on a bad check can be extremely damaging to your business. Not only is it money you don’t have, but it’s also time that you’ve already invested. Take the time and make the effort to get back the money that you are rightfully owed.

About the Author

Javi Calderon
Javi Calderon is a freelance writer, copywriter and journalist with interests in music, sports, small business marketing, and technology.
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