The acceptance of company or personal checks is one of the acceptable and necessary risks associated in doing business; therefore rapid and appropriate handling of bad checks is essential.
Checks may be returned for several reasons:
- Stop payment. The customer chooses to cancel check with his bank.
- Uncollected funds. Monies (in the form of checks) deposited in customer's account have not yet cleared and so the customer's check will not clear at this time.
- Insufficient or no signature. Customers occasionally forget to sign checks. Some checks require more than one signature, and one may be missing.
- Account closed. The customer has closed the account the check was written on.
- NSF or insufficient funds. Not enough money is on deposit to cover the check.
- Wrong party. Such checks are actually made out to other parties but deposited in your account.
- Foreign item. These checks are made out in U.S. dollars or Canadian dollars but are deposited in the wrong currency-type account.
Not all returned checks require legal or collection follow up. Foreign item and wrong party checks are the result of errors and should be followed up with the customers promptly on that basis.
"Stop payment" checks may be the result of errors, disputes or knowledge on the part of the customer that its check will not clear due to lack of funds. The reason for the stop payment should be promptly ascertained, and follow up should be based upon the results to that investigation, with no prejudicial action taken until that reason is known. Should the reason be lack of funds, however, the check should be treated as a dishonored item.
The remaining types of returned checks listed above under "Definitions" such as checks drawn on closed accounts are assumed to be dishonored items from the start. Such checks call for immediate action by the credit department to protect whatever rights the creditor may have to take action to enforce collection. Customers tendering such checks should receive prompt notice by telephone and mail (certified, return receipt requested) whenever possible. Additionally, no further orders should be processed.
Following the legal time limit prescribed by law for the State in which the check was written, and following as well the failure of the customer to solve the problem should be referred to a third party for collection if the customer refuses to honor its obligations.
Should the customer make good on the returned item, the terms on the account should changed to CIA, cash or certified check only for a period of time. At the end of that period and following a request by either the customer or your sales representative, the account should be checked to determine the appropriate credit terms for the future.
No terms should be guaranteed prior to that credit check by any employee of your company.
Should the customer issue two or more bad checks to your company, that account should permanently be changed to CIA, cash or certified check only. The creditor company should always reserve the right to use any legal means to obtain payment of a bad check, including bank collections, without notice to the customer; third party collections, or a lawsuit.
All bank or collection fees related to the dishonored check should be paid for by the customer before your company considers allows further sales on company check terms. Your company should report all dishonored checks to your industry credit group and/or to the credit reporting agencies you work with.
Source: Carol Krumm, Credit Manager
Edited by Michael C. Dennis, author of "1001 Collection Tools and Tips."