If a check is returned by a bank for nonsufficient funds (NSF), the business or individual to whom the check was written has the option of turning the check over to a collection agency. The collection agency either purchases the debt outright from the payee for a percentage of the outstanding amount, or accepts the debt for collection and then charges a fee if successful. All collection agencies follow the same basic procedures when collecting on bad checks.
The debtor has the right to dispute the debt and demand documentation that the debt is valid. After the collection agency opens the account, it must provide notice to the debtor of the amount of the debt and the original creditor. The amount must include any and all fees charged by the creditor, including NSF fees charged by the bank, collection fees, and bad-check charges. By law, debtors have 30 days from receipt of the notice to raise objections to the claim.
The collection agency then contacts the debtor by mail and phone and attempts to collect payment from the debtor or make payment arrangements. The agency may offer to discount the outstanding amount, or spread payments over several installments to persuade the debtor to settle the amount. The collection agency is limited by law in the times of day during which it can attempt to directly contact the debtor.
If the debtor cannot be located or contacted, the collection agency will attempt to find a valid address and phone, using skip-tracing services available on the Internet or from a private investigation agency. If the debt is large enough, the collection agency may recommend that the creditor file a civil suit to obtain a court judgment, which can be enforced by garnishment or seizure of property. Many states impose civil as well as criminal penalties for writing bad checks.
If the debt is finally collected, the collection agency processes the payment into its own accounts and then forwards the money to the creditor, withholding a fee. Fees vary by agency and by amount, but 25 percent of the amount collected is standard. The fee can rise for debts that are older or for lesser amounts, for example under $100. If the debtor pays the original creditor, then the creditor must inform the collection agency, which will then bill the creditor for the fee.