Dishonored check

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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 primary 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)).

Causes of dishonored check

  • Insufficient Funds: This is a common reason for a check to be dishonored. A check is dishonored when the account of the person who wrote the check does not have enough funds to cover the amount of the check.
  • Stop Payment: A check can be dishonored when the account holder instructs the bank not to pay the check, for whatever reason.
  • Closed Account: A check may be dishonored if the account on which the check was written has been closed.
  • Stale Check: A check can be dishonored if it is more than six months old.
  • Signature Mismatch: A check can be dishonored if the signature on the check does not match the signature that is on file with the bank.
  • Post-Dated Check: A check can be dishonored if it is post-dated, which means that the check is dated for a future date.
  • Illegal Check: A check can be dishonored if it is not legal, such as a check written on an unauthorized account or a check written for more than the amount in the account.

Limitations of Dishonored check

A dishonored check can have many limitations that can affect the person who wrote the check, the person who received the check, and the financial institution involved. These limitations include:

  • The issuer of the check may incur fees from their financial institution for the returned check.
  • The person who received the check may not receive the payment they were expecting and can be out of pocket for the face value of the check.
  • The financial institution that issued the check may be subject to penalties depending on the state’s regulations.
  • The financial institution that received the check may also incur fees from their financial institution for the returned check.
  • The financial institution that received the check may also be subject to reputational damage or legal action if the check is not honored.
  • The financial institution that received the check may also be subject to fraud detection and investigation if the check is not honored.

Other approaches related to Dishonored check

A Dishonored check can be handled in a number of ways. These include:

  • Negotiating the Check: Negotiating a check involves the payee requesting the bank of the person who wrote the check to pay the amount due. The bank may agree to pay the amount in full or in part depending on the situation.
  • Seeking Payment: The payee can also seek payment by directly contacting the person who wrote the check and requesting payment.
  • Taking Legal Action: In extreme cases, the payee can take legal action against the person who wrote the check. This may involve filing a lawsuit or seeking an order from the court to recover the money.

In conclusion, Dishonored checks can be handled in a number of ways, such as negotiating the check, seeking payment, or taking legal action. The best approach depends on the situation and may involve a combination of these approaches.


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References

Author: Sebastian Kopta