What to do when the check bounces
Sooner or later, it will happen to you: Your client's check gets returned by the bank for NSF (Not Sufficient Funds). Its an awful feeling to get that notice from your bank. You worry that maybe you got ripped off, that you'll never see that money again. You worry that you may have to take your client to court - a terrible waste of time with no guarantee that you will be able to collect IF you win.
More often than not, the check didn't clear because the client made an accounting error or a check they deposited has not cleared their bank yet. In many cases it was an honest mistake and your client has every intention of making good on their check. But every once in a while we come across a lousy client, a bad apple, who never had any intention of paying for the goods or services you provided. I'm fortunate that in all the years I've been in business as a professional home stager in Los Angeles, I've only had one client who defrauded me part of the money he owed for staging his home. I lost $1,500...not a devastating amount, but this client's dishonesty still rankles.
I've had other client checks returned for Not Sufficient Funds, but the client has always made good and I've been paid in full, plus any additional charges that were incurred.
Here are the 2 most important things you can do to protect yourself:
- Don't work with clients who are unethical or ask you to do something that makes you uncomfortable, clients that are having serious financial problems, clients who won't sign your contract or clients who ask you to work "under the table".
- Have a clearly written contract (make sure to get it signed by the client) that spells out the cost of your product or service, how payment can be made, when you expect to be paid, the penalties for not paying on time, and the penalties for a returned check. This is the most important step you can take to protect yourself and your business. Have an attorney, licensed to practice in your state, review it. It will be money well spent.
Following are some steps I take when I get a NSF check, or when the client is slow in paying their outstanding invoice:
1. Contact the person that gave you the bad check via email. Start a "paper trail" in the event you choose a legal solution if the client or customer refuses to pay. Write the email as if you are assuming this was merely an error or mistake on your client's part.
- Point out the date the payment was due
- Point out any charges outlined in your contract for returned checks
- Ask them when you can pick up another check (I always ask for a cashiers check or cash if a check bounces, but this is up to you) or if they would like to put the charge on their credit card.
If you become too aggressive too quickly, you stand a chance of offending a good client that made an error or mistake. You also stand a chance of closing the door on future communication and the possibility of getting paid if the client perceives you as too aggressive or unprofessional.
Always act professionally, even if you are angrier than you have ever been before.
2. If you don't receive a response within 24 hours, send another email. If possible, its best to do everything in writing. If you call the client, make sure to send them a follow up email outlining every thing you discussed and your understanding of what the client said. Again, that paper trail is all important. Your email and conversation should reflect an assumption that the client is going to pay you and you are inquiring when you can pick up payment.
You will usually know within the first 48 hours if your client is going to make good on their bad check or if they won't.
3. If you don't receive a response within another 24 hours, send a letter via registered mail to their home. Include a copy of the returned check. Ask them to contact you and let you know when/how they will make good on the bad check. Explain that you have sent several emails.
4. If the amount is less than your state's limit for Small Claims Court, you can file a claim. The cost is minimal, usually less than $100, but it is a large time commitment. In addition to the time it takes to file, you must make sure the other party is "served" papers informing them that you have filed a claim and a court date is set. Then you have to go to court and present your case. If the judge rules in your favor, you are then responsible for collecting (you may win, but you may not be able to collect). Most small claims courts do not allow the parties to be represented by an attorney in court, so you are on your own in the courtroom.
5. If the amount is significant enough, contact an attorney specializing in collections or a collection agency. You can hire them just to write a strongly worded demand for payment, or you can hire them to handle the collections. Most attorneys and collection agents receive 20%-33% of the amount collected, plus expenses, if it goes to court. They do not take on every case - only the ones they have a reasonable chance of collection. You can also sell the debt to a collections agency, in which case you will receive a smaller but guaranteed percentage. Very often, receiving a letter from an attorney or a collection agency is enough to motivate a reluctant client to pay.
I have found that by accepting credit cards and giving people an alternate way to pay, I get paid faster and have much less difficulty getting paid if a client's check bounces.
BTW, some collection agencies will take on collection of debt that is a few years old, so if you have a situation that occured a year or 2 ago, it may be worthwhile to contact a collection agency. I don't recommend sitting on a debt for a long time, but if you have, there still may be a chance to collect something.
If you are the person that wrote the bad check here are some steps to make sure the situation does not spiral out of control or that the person will work with you again:
What do you do when a client's check bounces, or they are slow to pay outstanding invoices?
- As soon as you discover that you don't have enough money to cover the checks you wrote, contact the people to whom you wrote the checks. Explain you just discovered the error and apologize. After all, you have just put them in a very difficult and uncomfortable situation.
- Offer to make good on the check and any fees they may have incurred when your check bounced.
- Don't be offended if they ask to be paid in cash or cashiers check to replace the bad check or for future purchases or invoices. They're just trying to make sure it doesn't happen again.