Avoid Bad Check Losses

Feb 1, 2009

No business is required to take personal checks, and any business can require customers to pay in cash. However, in order to avoid antidiscrimination claims, if you refuse personal checks, you must be sure that your policy regarding them is consistent and applies to all customers.

Here are three ways to avoid taking bad checks and another seven tips for collecting on them. First, how to avoid taking them in the first place:

  1. Get an address. Have the customer sign the check in your presence and make sure that the customer's phone number and address appear somewhere on the check. If the customer has an address that does not appear permanent or would make it difficult to trace later on, such as a hotel room or a post office box, think carefully before accepting the check.
  2. Avoid post dated checks. Examine the check carefully before accepting it. Beware of checks with crossed out or rewritten marks. Check the date to see if it is accurate. Also, be extra careful about accepting post dated checks, which cannot be deposited immediately. In some states, the writer of a post dated check cannot be held liable for writing a bad check.
  3. Confirm identity. Collect certain identification, such as a driver's license or passport, when taking checks. You may wish to write down the customer's driver license number on the check.

Following are some steps to take in attempting to collect on a bad check:

  1. Call the customer. Call and ask the customer to either write a new check for the amount owed or send you a cash payment. This points out the importance of collecting a customer's phone number and other contact information in advance. That said, be careful about when and how often you call the customer. To avoid problems, call during normal business hours. Do not discuss the debt with the customer's employer, and make sure your tone of voice remains polite throughout your conversation. Don't threaten to publicize the debtor's name or notify the debtor's employer of the debt. Threats during such a conversation could constitute harassment or extortion and are illegal.
  2. Write a letter. Send a certified letter, return receipt requested, making the same request that you made over the telephone. This is another reason for collecting customers' addresses when you accept a check. Keep a copy of the letter for your files, as this document may set the stage for a criminal prosecution if the check writer intentionally attempted to defraud you.
  3. Contact the customer's bank. If the customer's bank account is still active, wait a few days and then call the bank to determine if there are sufficient funds. Explain that you have a check for a certain amount and ask if there are enough funds in the account to cover it. Normally, banks are able to provide you with this information. If there are now sufficient funds to cover the check, take the returned check to the bank and draw out the cash. You can also ask the customer's bank for, "enforced collection." If the bank offers this service, the bank will make sure that the next deposit in the customer's account is transferred to you. The procedures and costs of using such services vary, and you can obtain details about this directly from the bank.
  4. Request prosecution. Intentionally writing a bad check is a crime. Note, however, that many states require you to send a written notice to the debtor before they may be prosecuted. That is why #2 on this list is important. The police department or district attorney in your area should be able to tell you if written notice is required, and also what information the written notice should contain. Take all of the above steps quickly, as many states have a two year statute of limitations to collect on debts for bad checks.
  5. Use Small Claims Court. Contact your county or municipal court for more information on what is required to file a claim.
  6. Seek additional damages for the bad check writer's failure to pay you post judgment. If the check writer fails to pay you after you have won a judgment in small claims court, you may be able to obtain additional damages. Under some state laws, after you have obtained a judgment against the bad check writer and made written demand for the amount due, you are entitled to an amount equal to $100, or triple the amount for which the check was drawn, whichever is greater, not to exceed by more than $500 the value of the original check.
  7. Investigate remedies that protect other merchants from bad check writers. You have the right to choose not to accept checks in the future from someone who has written you bad checks in the past, and to report the bad check writer to a database, such as TeleCheck, Shared Check Authorization Network or Chex Systems. Other merchants can use these databases to decide whether or not to accept checks from the writer in the future. Banks sometimes also use these databases in deciding whether to allow someone to open a checking account. Whether these remedies are appropriate, though, may depend on your relationship with the customer and what your goals are in seeking payment.

This article was edited from a story by Alison Schumach of the National Federation of Independent Business' (NFIB) legal center.

Topic: Business Strategies

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Article ID: 903

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