What Is a Cold Check and What Are the Consequences?
Navigate the complexities of cold checks. Learn about their nature, reasons, and the financial and legal repercussions for both issuers and recipients.
A cold check is a financial instrument that can unexpectedly disrupt transactions and lead to various complications for both the person who writes it and the recipient. Understanding the nature of these checks and their potential repercussions is important for anyone engaging in financial dealings. This knowledge helps individuals navigate unexpected banking issues and avoid unintended legal or financial liabilities.
Defining a Cold Check
A cold check refers to a check that a bank cannot honor or process due to specific issues with the account it is drawn from. This typically occurs when the “drawer,” the individual or entity who wrote the check, lacks sufficient funds in their bank account to cover the amount specified. Such checks are commonly known as “non-sufficient funds” (NSF) checks or “bounced” checks.
Beyond insufficient funds, a check can also become a cold check if the account associated with it has been closed before the check is presented for payment. When a check “bounces,” the bank returns it unpaid to the “payee,” the person attempting to deposit or cash it.
Reasons for a Cold Check
Insufficient funds are the most frequent cause of a cold check. This happens when the account balance is too low to cover the check’s value, often due to forgotten pending transactions, automatic payments, or a delayed expected deposit.
Other reasons for a check not being honored include a stop payment order placed by the drawer. Errors in filling out the check, such as an incorrect date, miswritten amount, or illegible handwriting, can also lead to it being returned unpaid. These situations can arise from simple oversight or, in some cases, from an intentional act.
What to Do If You Receive a Cold Check
The initial action should be to contact the person who issued the check to inform them of the issue and request immediate payment. Documenting this communication is important for future reference.
If direct communication does not resolve the matter, you might consider re-depositing the check, especially if the issuer assures you that funds are now available. Be aware that your bank may charge additional fees for each return. If repeated attempts fail, sending a formal demand letter via certified mail is a crucial step. This letter should detail the original check amount, any incurred fees, and a clear deadline for payment, establishing a formal record of your efforts.
Should the issuer remain unresponsive, pursuing the matter in small claims court is an option to recover the funds. In instances where the check was intentionally fraudulent, reporting the incident to local law enforcement authorities might also be a necessary course of action.
Legal Consequences of Issuing a Cold Check
Banks typically impose non-sufficient funds (NSF) fees, usually ranging from $25 to $35, for each returned item. The recipient’s bank may also levy a returned check fee on them, which the issuer might be liable to reimburse. If the bank covers the payment through overdraft protection, the issuer faces an overdraft fee, which can be similar in cost to an NSF fee.
Beyond bank fees, civil penalties allow the payee to sue the issuer for the check’s amount, along with additional damages and collection costs. Many states permit the recovery of statutory damages, often ranging from two to three times the check amount, in addition to court costs and attorney’s fees. Repeatedly issuing cold checks can also negatively impact an individual’s banking history, potentially leading to an account closure or being reported to services like ChexSystems, which can hinder opening future bank accounts.
When a cold check is issued with the deliberate intent to defraud, it can escalate into a criminal offense, varying in severity based on the check’s value and state laws. Knowingly writing a bad check can result in misdemeanor charges for lower amounts, typically under $500, potentially leading to fines and a short jail sentence. For higher amounts or repeated offenses, the crime can be classified as a felony, carrying more substantial fines, longer prison terms, and a permanent criminal record.