Bounced Checks; Returned Checks; Dishonored Checks; NSF Checks

An NSF check is one that cannot be processed because the party issuing that check has insufficient funds in their account.  Knowingly presenting an NSF check [ sometimes called a bounced check, a bad check or a dishonored check ] to a creditor is illegal.  Receiving a check as payment from a customer that is later returned for insufficient funds (NSF) is a warning sign that creditors should not overlook.  A NSF check is a strong indication that a customer is in financial difficulty.  However, it is possible but rare that a check may be returned as NSF due to an error by the bank. 

A bounced check may be an attempt to defraud the creditor.  For example, assume that a new customer pays COD for goods with a check that later bounces.  Was this a mistake, or fraud?   The key in determining whether fraud was involved always involves the debtor's state of mind, or “intent.” Most of the time, an NSF check results from mistakes and/or poor management. This would not be considered fraudulent.  Does an NSF check serve as a warning sign of a possible fraud? Some factors to consider are:

• Patterns of activity. While not generally admissible in court, patterns can nonetheless serve as strong circumstantial evidence that something is amiss. If you receive a large number of NSF checks, or if other suppliers receive many such checks, perhaps it is an indication that something more than poor management is involved.
• Checking accounts supported by other bogus checks from related parties.   The checks are often received from related parties just prior to the issuance of a flurry of NSF checks. The perpetrator can then claim that they thought they had money in the account, and show deposit slips to prove that their intentions were good. 
• Obvious misrepresentations. If you hear from a business owner that money is in the account, but the bank tells you that it has been overdrawn for two weeks, you are more likely to be dealing with a fraud than a case of poor management.
• An increase in ordering at the time an NSF check is submitted. Is the NSF check you have the largest check you have ever received from the account?   Does it correspond to an increase in ordering?   If so, it could serve as a tip-off that a fraud may be in the making! However, if the check is the same size as numerous previous transactions, it is less likely that you are dealing with a fraud.

An NSF check is not by itself proof of a fraud, but it is a clue that your company might be the victim of fraud.  Even if you are convinced that a customer is dishonest and that their decision to issue a payment was a deliberate attempt to commit fraud, you do not have enough information to confront the debtor with any accusation.  At this point, the key is to notify the customer about the fact that a check they issued has bounced.

Occasionally, a debtor will bounce two checks within a few days of each other.  One bounced check could be an error. Two returned checks can indicate that a debtor is in serious financial trouble.  Most creditor companies arrange with their banks to automatically redeposit checks returned due to insufficient funds.  Assuming that both checks have been redeposited and both failed to clear the second time, the creditor should contact the debtor as quickly as possible to protest the fact that NSF checks are being returned, and to demand immediate payment by wire transfer.  Wire transfer payment is the fastest and arguably the safest way to receive payment.  Your bank will be able to provide you with the specific information required to enable you to receive a wire transfer. 

After two NSF checks, the account will probably already be on creditt hold.  Occasionally, the debtor will offer to pay cash for new shipments.  It is important to carefully consider whether to continue to extend credit to the customer even if the check(s) clear.

One final thought:  Occasionally, a debtor that has bounced a check will offer to pay cash for additional shipments without addressing the NSF check.  In my opinion, the creditor should reject the proposal and hold out for payment against the NSF check instead.

Edited by Michael C. Dennis.  Mr. Dennis is the author of several books relating to credit risk management and commercial collections.  He is also consultant and can be reached by email at:  mcdennis13@yahoo.com