Bounced Checks; Collecting on Bounced Checks, NSF Checks

Around one million checks written in the United States each year are returned to the depositor.  The most common reason for returned [bounced] checks is insufficient funds.  Normally only individuals or companies that regularly and deliberately write NSF checks are pursued by law enforcement.

Most of the time, bounced checks result from poor record-keeping and they are not the result of a deliberate attempt to defraud creditors. When a customer bounces a check, the credit department should:

• Contact the debtor immediately and demand an immediate replacement in the form of a wire transfer or possibly a cashier's check.  If you accept a cashier's check, arrange for that check to be picked up and deposited as quickly as possible **
• Place the account on credit hold;
• Consider recalling any shipments in transit to the customer;
• Place all orders in the production or order management queue on production on hold;
• If the debtor is unwilling to replace the dishonored check, notify your attorney or law enforcement;
• If a check is returned because the account is closed, the creditor should be even more concerned than if a check bounces due to non-sufficient funds. Demand an explanation from the customer as well as an immediate replacement of the dishonored check;
• If you receive what turns out to be a counterfeit cashier's check or money order, contact law enforcement immediately

The sooner the creditor addresses a returned check, the more likely the creditor company is to be paid. Under no circumstances should the bounced check be returned to the customer until a replacement payment has been received and has cleared. The NSF check is evidence of the fact that a debt was owed, and the fact that the check did not clear may be evidence of the debtor company's intent to defraud you.

At one time, a Cashiers' Check was the preferred method of receiving payment because these checks were were thought to be a guarantee of payment.  That is no longer true.  In fact, there is a growing trend in the United States involving the use of fraudulent Cashiers' Checks.   Using a laptop computer, any decent color printer and good quality paper, it is easy to generate a fraudulent Cashiers' Check that would fool almost anyone not working inside the bank on which the check is drawn.  For credit professionals, the solution is to request a wire transfer payment rather than a Cashiers' Check.  It should not be a tough sell.  For a customer to get a Cashiers' Check requires a trip to their bank.  A wire transfer can often be arranged by your customer on the phone or using their computer.  The advantages of a wire transfer include:

• The fact that the creditor is paid more quickly meaning the product can be shipped more quickly; and
• Wire transfers confirmed by the creditor / seller's bank are not going to bounce and are extremely unlikely to turn out to be fraudulent. 

© 2009 by Michael C. Dennis.  All Rights Reserved.  Michael is the author of "1001 Collection Tools and Tips." 

Edited by Michael Zininberg