Bad Checks

[grelady]

As a small business owner in Ohio, what can I do to collect on customer checks that are returned fromt their bank for non sufficient funds?

 

[I AM ALWAYS LIABLE]

As a small business owner in Ohio, what can I do to collect on customer checks that are returned fromt their bank for non sufficient funds?

Dealing With Bad Checks

Even though you take all reasonable precautions, a bad check will occasionally slip through your system. A bank may return a check to you with the notation "insufficient funds" or "NSF," which means the same thing: the customer has an active account but there's not enough in it to cover the check. Or a bank may inform you that the account has been closed.

Here are some steps you can takemany of which apply primarily to bad checks from individuals. Other techniques may be more appropriate when the bad check comes from another business.

Step 1. Call the Customer

Call the customer and ask that he or she make the check good or pay you in cash. (This is one reason it's good to write down the customer's phone number when you take a check, if permitted by state law.) But be careful about when you call the customerand how often. Laws in several states limit what you can do to collect debts. (See Chapter 19, Section D.) To avoid problems, call only between 8 a.m. and 9 p.m., don't discuss the debt with the customer's employer and make sure your request for payment is polite. Threatening a debtor that you'll publicize his or her name or notify his or her employer is illegal.


Step 2. Write a Letter

Send a certified letterreturn receipt requestedmaking the same demand. This sets the stage for a possible criminal prosecution if the check-writer intentionally attempted to defraud you. Also, 35 states (including Arizona, California, Colorado, Florida, Illinois, Montana, New York and Washington) have bad-check laws that are particularly favorable to businesses. In such states, if you send a written demand for payment, you may be able to collect extra damages in court (often two or three times the value of the check) if the check-writer doesn't come through.


EXAMPLE:Monica, the owner of a Florida gift shop, receives a bad check from Norbert. She sends Norbert a notice demanding payment in full plus a service charge of $15 or 5% of the check, whichever is greater. If Norbert doesn't pay within seven days, Monica can sue him under Florida law for the amount of the check plus additional damages of three times the amount of the check (at least $50). This is in addition to court costs, reasonable attorney fees and any bank fees that she incurs.


Step 3. Contact the Bank

If the customer's bank account is still active, wait a few days and then inquire to see if the check is now good (the customer may have deposited a paycheck after the check was dishonored). You can normally check the status of an account by calling the bank and saying you hold a check for a certain dollar amount and asking if there is enough in the account to cover it. If so, take the returned check to the bank and draw out the cash. Another alternative is to ask the customer's bank for "enforced collection." If the bank offers this service, the bad check will be held in a special category. The next money deposited in the customer's account will go to you. Procedures and costs vary; get details from the bank.


Step 4. Request Prosecution

Intentionally writing a bad check is a crime. As noted above, before you contact the local district attorney's or prosecuting attorney's office to request prosecution, you may have to give the check-writer a written notice. After all, the bad check may have been an innocent mistake. The police department or district attorney can tell you if you must send a notice as a prelude to a prosecution (generally you must) and what the notice must contain. But again, in any oral or written communication with the customer who passed the bad check, avoid the temptation to threaten prosecution. Such a threat may constitute harassment or extortion under some state statutes.

What are the chances of law enforcement officials taking action? Some police departments and prosecuting officials drag their feet on these kinds of cases, saying that they don't want to be used as a collection agency. Others are far more cooperative. Some of the best have bad-check programs under which the person who has written the check is

contacted and given a chance to avoid being prosecuted by making the check good and, in some counties, by attending special classes under a "diversion" program.

Step 5. Use Small Claims Court

If you still haven't been paid, consider suing in small claims court, as long as the check is less than the maximum amount you can sue for in small claimsor close enough that you don't mind waiving the excess. Most states have limits of $2,000 to $5,000. (See Chapter 23 on how to represent yourself in small claims court.) As noted in Step 2, if you've followed the bad-check procedures in your state, you may be entitled to two or even three times the amount of the check as damages as well as your court-filing and service-of-process costs. And if the check-writer has a job, you'll generally be able to use post-judgment proceedings to get paid out of the worker's wagesalthough it's difficult to collect from the wages of low-income people. You might also be able to collect from bank or other deposit accounts. In most states, you can also cheaply and easily put a lien against the debtor's real estate. Chances are you'll ultimately be paid when the property is voluntarily sold or refinanced.


Step 6. Use a Collection Agency

Turning a bad check over to a collection agency is often worth considering. For smaller checks, going to small claims court may not be worthwhile. Or perhaps, despite the huge cut a collection agency takes, you might want to put your time and energy elsewhere. And while some states make small claims court fairly friendly to businesses (for example, you may be able to send an employee to court with business records), other states make the business owner appear to testify in person. That may make suing the check writer more trouble than it's worth. So if you want to keep to a minimum your personal involvement in the collection process, keep open the possibility of letting a collection agency do most of the work. When the Customer Stops Payment
Sometimes a customer stops payment on a check, claiming that the goods you sold were defective. If there's a legitimate dispute, the customer's good faith will be a valid defense to a prosecution or a civil lawsuit for multiple damages. And if it turns out that the goods were in fact defective, the customer will be entitled to a reduction of the amount owedor even, in extreme cases, a cancellation of the debt. But if the customer's allegations are a trumped-up excuse to get something for nothing, you'll be entitled to your full legal remedies in court. Often, however, in dealing with a customer who is unhappy with the merchandise purchased, the best policy is simply to have the customer return the goods and to call it a day.


Payment in Full
Be careful about accepting and depositing checks that say "Payment in Full" or something similar. If the check writer owes more, you may be barred from collecting the additional amount.

Where there's a good faith dispute about how much the check writer owes you, depositing a full-payment check usually means that you accept the check in complete satisfaction of the debt. Crossing out the words "Payment in Full" generally won't help you. You'll still be cut off from suing for the balance.

However, a number of states have changed this rule to help creditors. In those states, if you cash a full payment check and explicitly reserve your right to sue for the balance, you can go after the check writer in court. States that have this modified rule include Alabama, Delaware, Massachusetts, Minnesota, Missouri, New Hampshire, New York, Ohio, Rhode Island, South Carolina, South Dakota, West Virginia and Wisconsin.

If your state has modified the rule, you normally can preserve your right to sue for the balance by writing the words "Under Protest" or "Without Prejudice" with your endorsement. California simply lets you cross out the full-payment language, cash the check and sue for the balancebut the check writer may be able to get around this by following certain procedures specified in the statute (California Civil Code §1526). The statute was created to protect creditors, not debtors, however, so in most instances you can defeat a "Payment in Full" check.