Dishonored check is a check that a bank refuses to pay. Check is usually dishonored when the account of the person who wrote the check has insufficient funds to pay the check. Paying banks must return the dishonored checks to the depositary banks when they decide not to pay certain checks.
The paying bank generally has until midnight of the day following presentment called midnight deadline to return dishonored checks or send notices of dishonor. Dishonored checks may be returned by the paying banks, similarly as return items, directly to the depositary banks (General Accounting Office (1998)).
Reasons for dishonoring a check
The Check can be dishonored because:
- The Person who wrote the check has insufficient funds to pay the check.
- The amounts written in figures and in words do not agree.
- The payment on the check has been stopped by the person who wrote the check.
- The check is expired.
- The signature of the person who signed the check is different from the one on the signature card at the bank.
- The check appears to be counterfeited.
- The check was written on a closed account
(Claudia Bienias Gilbertson, CPA, Mark W. Lehman, CPA (2009)).
Banks differ significantly in terms of decision-making and can view these decisions as a matter of customer service. A dishonored checks may have negative affect to the credit rating of the person or business that issued the check. Sometimes money for a dishonored check can be collected directly from the funds of person or business that wrote the check. But sometimes the value of a dishonored check cannot be recovered and becomes an cost to the business (General Accounting Office (1998)).
Cost of dishonored check
The bank either loans you the funds and charges you a penalty fee if you overdraw your account without overdraft protection. Dishonored check chargers are usually high. In this case, you will also have to pay a dishonored check charge to the person or business you originally wrote the check to. It is illegal to write a check with non sufficient funds (Sharon Burton, Nelda Shelton (2010)).
Check-collection process in the United States
System of laws and reagulations is regulating the check-collection process. In the USA the primery laws affecting checks are Article 3 and 4 of the Uniform Commercial Code (UCC) in force in each state, the Expedited Funds Availability Act (EFAA) and the Federal Reserve Board's Regulations CC ang J.
Uniform Commercial Code is a collection of model laws that guide financial and commercial activities. All the states are encouraged to enact (UCC) in a uniform manner.
Expedited Funds Availability Act's aim is to limit the time that banks can hold funds deposited into customer accounts before these funds must be made available for collection.
Regulation CC same as (EFAA) controls the collection and return of checks. Hovewer, Regulation J controls checks withdrawed through the Federal Reserve System (General Accounting Office (1998)).
- General Accounting Office (1998), Experience With Electronic Check Presentment, Washington
- Claudia Bienias Gilbertson, CPA, Mark W. Lehman, CPA (2009), Century 21 South-Western Accounting, South-Western Cengage Learning, Mason
- Sharon Burton, Nelda Shelton (2010), Practical Math Applications, South-Western Cengage Learning, Texas
Author: Sebastian Kopta