Bad checks and bankruptcy.(credit column)

It's bad enough to learn that your customer just declared bankruptcy. You sold them goods on open credit terms, you continued to ship COD even though they were having trouble making payments on the past-due account, and now this. Not only did your customer file bankruptcy, now your bank has informed you that the customer's most recent payment has been returned because of insufficient funds!

What's a credit manager to do? Of course you will file a proof of claim for the balance due on the account. But what about the bad check? Somehow a bad check feels different from a simple past-due account balance. They probably knew the check was bad when they wrote it. Surely you can do more than just file a proof of claim.

Sure, you can pursue criminal charges on the NSF check, but isn't that really just a collection strategy? After all, in most jurisdictions the "sentence" for such a crime is to pay a fine and make sure the recipient of the check receives the face amount of the check. Remember that the automatic stay prevents any further collection activity except through the bankruptcy court.

In the complicated scenario where the customer was pursuing actual fraud, there may be a number of things the creditor will want to do over and above simply filing a proof of claim. In the ordinary run-of-the-mill case though, there really is not much more that you will want to do.

You might try getting relief from the stay, but you will need more than the simple presence of an NSF check to convince most bankruptcy judges that you should be entitled to special treatment. If the court allows you to pursue a criminal NSF check proceeding, the court's order will likely allow pursuit of the criminal charge up to the collection of the face amount of the check--the bankruptcy court will retain jurisdiction over the disbursement of any amounts recovered as a fine or penalty. Even if you can't get special treatment, in some instances a motion for determination as to whether the stay even applies may gain you some advantage.

Considerations for the Court

Do you really need to get relief from the stay to pursue criminal prosecution of the NSF check? The U.S. Supreme Court has ruled that criminal actions are exempted from the application of the automatic stay. Some bankruptcy courts don't even make any inquiry into the facts or purpose of the criminal action--they simply apply the statute to all criminal actions, regardless of underlying purpose. However, many bankruptcy judges look beyond the statute to peer into the "intent" or "purpose" of the creditor seeking to pursue a criminal proceeding related to an NSF check.