Legal Factoid...
G. Bradley Hargrave, Esq.
Check acceptance will result occasionally in the return of an unpaid item. Perhaps the most frustrating situation encountered by the holder of a dishonored check is that of the drawer's bankruptcy.
While bankruptcy is too broad a topic to be addressed adequately here, typically, the filing of a bankruptcy petition operates to create an automatic stay prohibiting virtually all collection activity. Generally, the petitioner's debts are discharged, leaving the holder of the bad check empty-handed. Moreover, the holder's failure to honor the automatic stay may result in the debtor's recovery of actual damages, including costs and attorney's fees, and in appropriate circumstances, punitive damages.
Although most debts are discharged in bankruptcy, exceptions do exist, including "any debt for money, property or services obtained by false pretenses or actual fraud, or the use of a writing on which the creditor reasonably relied and the debtor caused to be made or published with intent to deceive." (11 U.S.C.S. 523).
Bankruptcy courts in Ohio, Idaho, Indiana, Washington and elsewhere have applied this exception to checks drawn on insufficient funds or closed accounts, thus permitting the holder of the dishonored check the right to proceed with its collection efforts.
Notably, however, the courts are divided on the application of this exception to bad checks. Therefore, a merchant holder of a dishonored check, drawn by a debtor in bankruptcy, should contact an attorney to discuss the merits of filing a complaint for a judicial determination of the debt's dischargeability before proceeding with collections.
