Bad checks are a problem for most businesses. Because small businesses rely on maintaining certain levels of cash flow, collecting on bad checks is especially crucial for them. Although check writing has decreased due to the use of debit cards, bad checks from customers are still an issue.

The best business plan is to take steps to avoid, or limit, bounced checks. But, because your business will most likely have to deal with a bad check at one time or another, it is important to have a written bounced checks policy and an established method for handling bounced checks. When faced with the problems caused by bad checks, consider the following:

1. Communication with the customer that is bouncing checks can often resolve the problem.

2. You can find businesses who specialize in collecting on bounced checks.

3. There are legal remedies available for collecting on bad checks, especially if the customer persists.

Action Steps
The best contacts and resources to help you get it done

Designate an employee to contact the writers of bad checks

A bounced check is often a mistake, and quite embarrassing to the customer. Have a designated employee contact the customer to explain your business's policy. Offer a 'No Harm, No Foul' chance for the issuer to make the check good. Be prepared to offer payment terms if the check was for a substantial sum.

I recommend: PoliciesAndProcedures.com offers sample problem check policies to guide in the development of one for your business. Articlesbase has an explanation of basic check clearing policies, which will help you develop your bad check guidelines for your business and the employee that will be following up with the customer.

Trust collecting on bounced check to a professional collection agency

If you've tried to recoup your losses with no luck, engage a collection agency. They specialize in difficult bounced-check scenarios. Work out the terms you'll accept from the offender before turning the collection agent loose.

I recommend: The Association of Credit and Collection Professionals offers information about collections and legal proceedings for bounced checks as well as contact information for several collection agencies. USA Credit Recovery is one of the leading national collection agencies, specializing in business-to-business claims. Review its collection process.

Take the customer that is bouncing checks to court

The employee or team handling bad checks should be familiar with the applicable laws. For small balances, go to small claims court. The process is fairly easy and you don't need an attorney, or attorney fees. Larger sums may require a lawyer and more complex legal proceedings.

I recommend: You can find bad check forms for court submission at 1StopLegal.com. Note that each state has its own forms and policies. JustAnswer.legal will answer simple questions about collecting on bad checks in small claims court.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Be sure your bounced checks policy is clearly written and available to all customers.
• •  Check with your bank about its bounced checks policy, especially on resubmitting bad checks. Most banks permit one resubmission. It might be best to not consider a check bad until the entire resubmission process is complete.

Bum checks are the bane of many a small business. For local businesses especially, accepting checks is a service to customers that is hard to eliminate. But any business that accepts checks will ultimately be faced with some that bounce – returned for insufficient funds – and have procedures to deal with returned checks is imperative.

These are the steps you will want to take:

1. Reduce your likelihood of receiving a bad check
2. Put systems in place to monitor and salvage bounced checks internally
3. Be prepared to take legal or civil action to recover your cash

Action Steps
The best contacts and resources to help you get it done

If yours is a retail business, take steps to avoid bad checks

Accept local checks with a preprinted name and address. Require that checks are written and signed in your presence. Don't accept third-party or post-dated checks, and verify large checks with the issuing bank.

I recommend: Telecheck, Cross-check and Echo all provide check verification services you can subscribe to. You might also consider PayPal if you are an Internet business.

Contact customers who write a bad check

Nearly everyone bounces a check from time to time by mistake. Have your bookkeeper confirm with the check issuer that this wasn't a mistake. Ask for immediate replacement of the check. Make sure your sales team doesn't continue to offer products to customers who have issued checks with insufficient funds to cover them.

I recommend: Find Accounting Software can help you find software that automatically alerts all departments to trouble with a client.

Employ electronic check re-presentment

Checks go through the traditional clearing process only twice, but electronic check re-presentment gives you a third chance to get paid.

I recommend: Contact The Electronic Payments Association (NACHA) for more information.

Consider small claims court

If the balance is small you can go to small claims court without an attorney.

I recommend: Lawguru.com offers answers to most simple questions regarding filing and collecting with small claims. Each state has its own FAQ and/or forms area on the Web for Small Claims.

Use collection agents to recoup

If you're having trouble collecting from clients, call a collections agent. Get a collection agency specialist to help you out.

I recommend: Find one at The Association of Credit & Collection Professionals.

Tips & Tactics

Helpful advice for making the most of this Guide

• •  Establish clear credit policies with clients so they are liable for all overdraft, legal or collection fees.
• •  Move fast. If a customer is in trouble, there are likely to be others asking for compensation. Be first in line.
• •  You can usually resubmit a check once. Consider your customers' cash flow. Submit the check at a time when you think their cash flow may be better: perhaps early in the month, or the day before payroll.

Federal, state, and local rules may apply to bounced checks. As a bank or other financial institution, it's in your best interest to learn all you can about these laws so that you provide complete compliance. Doing this will help prevent a regulatory review and thwart possible litigation from clients.

Banks can generally set their own rules through their own board of directors or other governing body to have some local control; however, compliance with all state and federal laws remains key. Consider this other information on bounced checks laws and regulations:

1. Federal law doesn't govern service fees on bounced checks, nor does state law, in most cases. Instead, service fees are seen as an individual contract between the bank and the customer.

2. Compliance remains tricky with the relatively constant advance of new bounced checks laws and regulations. Make sure you keep up to date on new legislation by hiring a regulation consultant firm or attorney.

3. Returned electronic checks or debit card transactions that come up as insufficient funds are generally bound by the same penalties and rules as bounced paper checks.

Action Steps
The best contacts and resources to help you get it done

Research federal bounced checks laws and regulations

Federal regulatory agencies have some control over local banks; however, they have the most control over national banks. Many states adopt into their state statutes federal regulations such as the Uniform Commercial Code.

I recommend: Cornell University Law School provides a review of Uniform Commercial Code Article 3 dealing with check laws. Research the bank's responsibility for the collection of checks and other rules through the Federal Deposit Insurance Corporation's section on FDIC law, regulations, and related acts.

Comply with state bounced checks laws and regulations

Each state supplies its own unique banking rules, including the limit on the amount of overdraft or insufficient funds fees that may be assessed, especially if the institution is state chartered. Review the laws in the state where you do business when setting your policy or making any changes to it.

I recommend: Check out Wisconsin law on issuing a worthless check, Code 943.24. Use the Georgia Code Research Tool from LexisNexis to look up Georgia's 13-6-15 code on bounced checks.

Consult with an attorney on bounced checks rules and regulations

Even if you aren't facing a bank examination by any federal banking agency, it may be helpful to hire an attorney specializing in banking and finance. This attorney will be able to inform you on compliance issues with all state and federal banking laws. The attorney will also be able to advise you on any conflicts concerning rules you may want to set at the local level.

I recommend: The Jorden Burt firm can offer consulting in regulatory activities for those in the consumer finance and baking industry. The Maxim Law Firm of Atlanta, GA, specializes in banking and lending disputes.