What to Do if You Receive a Bad Check

When your business accepts payment by check, or when you engage in a personal transaction and are paid by check, you run the risk that a check will be dishonored. Although technology is available to allow for the electronic deposit of a check at the time of a transaction, whether through a merchant account or through an app on your mobile phone, even those technologies cannot remove all risk.

If you receive a check that is dishonored by a bank, the reason why the check did not clear may indicate a minor problem that is likely to be easily resolved, or may reflect a more serious problem that could result in a lawsuit or even in your making a report to the police for possible criminal charges against the issuer of the check.

Nonsufficient Funds (NSF) Checks

A check that is issued from a bank account that does not contain sufficient funds to cover the amount of the check may be returned as a NSF check.

In most cases the NSF designation reflects that the issuer's checking account is overdrawn. Your bank will typically charge you a fee for depositing a check that does not clear.

You may attempt to re-deposit a NSF check, but before you do so and risk incurring an additional fee, consider the following options:

  • Contact the Issuer: The person who issued the check may have committed an honest mistake, and may potentially be willing to make a payment in cash or by money order to cover the amount due.

  • Contact the Bank: Although the bank won't share with you the balance of the bank account, they may be willing to tell you if the account holds sufficient funds at that moment for the check to clear.

If you are unable to obtain payment for the check from the issuer and cannot get confirmation from the issuer's bank that the check will clear, you should investigate your state's nonsufficient check laws. You may be able to make a formal demand for payment that, if not successful, may be used as the basis to have the police investigate the non-payment as a possible criminal matter.

Sometimes the police will decline to get involved, in which case you may consider pursuing the issuer of the check in small claims court.

Postdated Checks

If you allow a customer to issue a post-dated check to you, you are effectively extending credit to that customer.

If the check does not clear when deposited, the state will not ordinarily treat the non-payment as a criminal offense, meaning that you'll have to try to recover the money through a collections process or civil lawsuit. If you agree that you will hold the check for a period of time before you attempt to deposit it, the same is true even if the check is not post-dated.

Civil Remedies

State remedies for bad checks can vary:

  • Unless you have entered into a binding contract with your customer that allows you to assess additional fees, in some states your damages in court will be limited to the face value of the check.
  • In some states you may be able to impose a bad check fee by posting a conspicuous notice of that fee at the point of purchase.
  • Some states allow for an additional civil penalty for a NSF check, such as permitting a successful plaintiff to potentially recover two or three times the face value of the check.

No matter what state law provides, recall that you will be responsible to collect the amount of any judgment you obtain against the issuer, and that you may end up with a judgment that you are unable to collect.

You should investigate your state's NSF check laws before going to court, as you may find that litigation is simply not going to be a cost-effective use of your time.

Uncollected Funds

When a check is returned with the notation that it was drawn on uncollected funds, that normally means that the issuer wrote the check while a deposit was pending in their checking account and that you attempted to cash the check before that deposit cleared.

If you want to redeposit the check, you can attempt to confirm that the check will clear with the issuer's bank, or by contacting the issuer.

Although most often this problem occurs through carelessness, not ill intent, if the issuer does not promptly make good on the check you may have to explore your legal options.

Checks from Closed Accounts

When a person issues a check from a closed account, it's almost never by accident. The person may offer a litany of excuses, including the claim that they grabbed the wrong checkbook, that they didn't know that the account had been closed, or that the bank made a mistake - but in the overwhelming majority of cases they knew that they were giving you a check that was not valid.

The rare exceptions:

  • The customer had a valid reason to close the account after issuing the check to you, such as might occur if somebody stole the issuer's checkbook and is issuing fraudulent checks from the account; or

  • The bank closed the account without notice to the account holder, as might occur if the account holder deposited a check or money order that was discovered to be forged.

If the customer truly did not know that the account was closed at the time the check was issued, the customer should be willing to make things right by promptly paying you the amount that they owe.

Whenever a check is returned to you marked "Account Closed" or "Refer to Maker", you should assume the worst - that your customer is trying to cheat you and avoid payment. Unless the customer shows up immediately with full payment, you should aggressively pursue your legal remedies, including making a police report.

Stop Payment Orders

When a customer stops payment on a check, you should anticipate that you will have difficulty obtaining payment. Banks charge a fee to stop payment, and the fee is often hefty.

If you do not already know the reasons why your customer stopped payment, you can contact your customer to try to obtain an explanation. Odds are your customer has a complaint about the goods or services you provided. You may be able to resolve the customer's complaints or objections and secure payment.

When a customer stops payment on a check, the customer's action is much more likely to be deemed a civil matter that you must resolve through a lawsuit, as opposed to a criminal matter. That is, the police will typically decline to get involved and tell you that you need to collect the money through the civil court system.

Depending on the reasons why the customer stopped payment, if you sue for payment you may end up facing a counter-claim filed by the issuer based upon the reasons they have given for stopping payment.

Copyright © 2016 Aaron Larson, All rights reserved. No portion of this article may be reproduced without the express written permission of the copyright holder. If you use a quotation, excerpt or paraphrase of this article, except as otherwise authorized in writing by the author of the article you must cite this article as a source for your work and include a link back to the original article from any online materials that incorporate or are derived from the content of this article.

This article was last reviewed or amended on Apr 13, 2018.