What Does a Returned Check Mean?
Understand why checks bounce, their impact, and how to resolve or prevent this common banking issue.
A check is a written instruction directing a bank to pay a specific sum of money from one person’s account to another. It includes details such as the date, the amount, the payee’s name, and the payer’s signature.
Sometimes, a bank cannot complete this payment instruction, leading to a “returned check.” This signifies that the transaction has failed, and the funds will not be transferred as intended.
What a Returned Check Means
A returned check signifies that the bank has refused to honor the payment instruction. This means the funds the check was supposed to transfer were not released from the payer’s account to the payee’s account. The bank rejects the payment, returning the check to the party who deposited it.
Common terms for this outcome include a “bounced check,” a “dishonored check,” or an “insufficient funds (NSF) check.” The process involves two parties: the check writer (payer or drawer) and the check recipient (payee). Their banks act as intermediaries in processing the transaction.
Common Causes for a Returned Check
A check can be returned for several reasons, with the most frequent being insufficient funds (NSF). This occurs when the check writer’s account lacks the necessary balance to cover the amount. The bank will not process the payment if there isn’t enough money available.
Another common reason is a stop payment order, where the check writer instructs their bank not to pay a previously issued check. This might happen if a check is lost or stolen, or if there is a dispute over a purchase. Banks honor these requests, preventing the check from clearing.
A check may also be returned if the account it is drawn upon has been closed. Issues with the check itself, such as it being post-dated (presented before its stated date) or stale-dated (presented too long after its stated date), can lead to a return.
Banks verify the signature on a check against their records to prevent fraud. A significant discrepancy between the signature on the check and the one on file can cause the bank to return the item. Incorrect or missing information, such as an invalid account number, an unclear payee name, or the absence of a date, will also result in a check being dishonored. An account freeze or hold due to legal reasons or suspected fraudulent activity can also prevent checks from clearing.
Consequences for All Parties
The repercussions of a returned check impact both the check writer and recipient. For the check writer, financial penalties are immediate and often include a non-sufficient funds (NSF) fee from their bank, typically ranging from $25 to $35 per returned item. If the bank decides to cover the payment through an overdraft, an overdraft fee of a similar amount may be charged, potentially alongside an extended overdraft fee if the account remains negative.
Beyond bank fees, the check writer may incur additional charges from the payee, known as returned check or merchant fees, which can add another $20 to $40. Repeated instances of returned checks can lead to negative impacts on one’s banking relationship, potentially resulting in account closure. In some situations, especially with fraudulent intent or repeated offenses, writing bad checks can carry legal implications, ranging from misdemeanors to felonies depending on the amount and jurisdiction.
For the check recipient, a returned check primarily causes inconvenience and a delay in receiving expected funds. Their bank may also charge a returned deposit fee, which can range from $10 to $25, to cover the costs associated with processing the failed transaction. The recipient must then pursue alternative payment from the check writer, which can be time-consuming and disrupt cash flow, particularly for businesses.
Steps to Resolve a Returned Check
When a check is returned, prompt action is necessary for both the check writer and the recipient to mitigate negative effects. For the check writer, the immediate step involves contacting their bank to understand the reason for the return and inquire about any associated fees. Address the underlying issue, such as depositing additional funds to cover the amount or resolving any account discrepancies.
The check writer should then communicate with the payee to inform them of the situation and arrange for an alternative payment method. This might involve sending a new check, making an electronic transfer, or paying with cash or a money order. Resolving the debt quickly can help prevent further fees and potential legal action.
For the check recipient, upon notification of a returned check, contacting the check writer is the first action. Inform them of the returned item and request an alternative, reliable form of payment. If the issue was due to insufficient funds, the check might be re-deposited after confirming with the writer that funds are now available, though this should be done cautiously. Clear and timely communication between both parties can facilitate a smoother resolution process.
How to Avoid Returned Checks
Preventing returned checks requires diligent financial management from both the check writer and the recipient. Check writers should regularly monitor their bank account balances to ensure sufficient funds are available before issuing a check. Reconciling bank statements frequently helps track expenditures and deposits accurately, minimizing accidental overdrafts. Verify all check details, including the date, payee name, and amount, before signing and issuing the check.
Check recipients can also take proactive steps to reduce their exposure to returned checks. Before accepting a check, especially for significant amounts, consider verifying the check writer’s details. Promptly depositing checks ensures they are processed while funds are likely available. For critical or large payments, exploring alternative payment methods such as electronic transfers, wire transfers, or certified funds like cashier’s checks can offer greater security and reduce the risk of payment failure.