6 Ways Business Owners Can Collect on Bad Checks

Jul 3, 2024

No business owner wants to have to collect on bad checks, but sometimes it can't be helped. Learn 6 low stress ways to make sure you get paid.

This post from Dean Kaplan of The Kaplan Group originally appeared in the Groupon Merchant blog in 2015 and has since been updated to reflect relevancy and accuracy. 

Is there anything more frustrating to a business owner than trying to deposit a check only for it to bounce? Depending on the amount, figuring out how to collect on bad checks can be just a headache or a full-blown emergency. For instance, for a floral designer, a returned check for a $45 bouquet doesn’t sting quite as much as one for a $3,500 order for a large wedding.

If your first reaction is to sue in small claims court, keep in mind that even if you win, you may still be responsible for collecting on the debt. As a result, more than half of all judgments don’t get collected.

The good news is that you have many other options. Use these six ways to collect on a bad check without going to court.

1. Contact the Bank First

It could just be that the account didn’t have enough funds yet when you first attempted to cash the check. Be wary of simply trying to deposit the check again, though. If the check bounces a second time, you may incur another costly NSF fee. Additionally, many financial institutions only allow a check to be represented two or three times. A premature second attempt could waste your check representment opportunities and force you to take more complicated measures.

Instead, wait a few days, then call the bank. Let them know you have a check for a certain dollar amount. Ask if there are sufficient funds to cover it. If that doesn’t work, ask the bank if they offer enforced collection. If they do, the next deposit to the customer’s account will go straight to you.

2. Call Your Customer

Not every bad check comes from a bad person. In 2016, American consumers paid $15 billion in fees for bounced checks and overdrafts, often unintentionally. It could very well have been an honest mistake. Call your customer before you take more drastic action to collect on a bad check. As politely as possible, ask how he or she would like to pay–via credit card over the phone, or in cash ASAP.

Ensure you can actually call your customer by looking to see if their phone number is on the check at time of payment. If not, write down their phone number (this is not legal in every state, so please check your local laws first!)

3. Send a Certified Letter

If you cannot reach the customer, send a certified letter asking nicely but firmly that the debt be paid within a certain time frame. Make sure to request a return receipt from the carrier and keep copies of both the letter and the receipt for your records.

This establishes a paper trail documenting the issue. It also fulfills the rule some states have requiring you to give the recipient a set number of days’ notice to pay the debt before you can sue in small claims court. Sending a written demand may even allow you to collect extra damages if you do end up pursuing legal action.

4. Call Your Local District Attorney’s Office

Many local District Attorneys have a bad check restitution program that will help you collect on bad checks. This varies by jurisdiction, but typically your customer will be contacted and given a chance to pay their debt to avoid prosecution.

In reality, these letters are often sent by collection agencies contracted by the District Attorney, not by the D.A.’s office itself. District Attorneys rarely actually investigate or prosecute a bad check writer. However, the agencies are allowed to use the District Attorney’s letterhead, making it look like it’s straight from the D.A. Sometimes just the threat of legal action from a state official is enough to magically spur payment.

5. Use a Check Recovery Service

This is a little-known option, and it may be better option for you than a collection agency. Not only do you get 100% of the check value, they often have collection agency services if check recovery doesn’t work.

A check recovery service takes over your efforts to collect on bad checks after your first deposit attempt fails. They then use a call center to monitor the check writer’s account on a daily basis so that they know immediately when the account has sufficient funds. This lets them strategically time the next attempt(s) to deposit the check, maximizing your chances of success without squandering representment opportunities.

Check recovery services are typically free. You keep the entire value of the check. The call centers are funded entirely by the state-mandated fee that you’re entitled to charge the check writer for writing a bad check.

6. Contact a Collection Agency

Collection agency rates range from 20% to 50% based on the size of the debt, but honestly, it’s still a better option than suing in small claims court. When you work with an agency, you don’t have to put in any work. There’s also a much higher chance that you will collect something.

Secure Your Cash Flow While You Collect on Bad Checks

Hopefully, these tips will help you collect on a bounced check without legal action. If you do decide small claims court is your only option, though, many states have laws that are particularly favorable to businesses attempting to collect on bad checks.

However, lawsuits are expensive, especially when you’re already missing funds from bounced checks. If this is impacting your ability to support your business, look into some alternative financing options and ways to supplement your cash flow, such as becoming a Groupon Merchant.

We recommend you also take steps to proactively protect yourself against the possibility of a big-name client declaring bankruptcy. This scenario is similar to getting an NSF check, since you can’t collect what you’re owed, but it can put you in an even more precarious financial position.

So, what tactics have you used in the past to successfully collect on bad checks–or bad debts in general? Let us know in the comments!

Any views, opinions, advice, or endorsements herein are the author(s)’s and are not necessarily the views of Groupon or its partners.

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