What Is a Return Check? Causes and What Happens Next
Understand the nature of returned checks, their implications, and how to effectively navigate this common financial occurrence.
A returned check occurs when a bank declines to process a check presented for payment, sending it back to the depositing institution. This signifies payment could not be completed. Understanding returned checks is important for anyone involved in financial transactions, as they can lead to unexpected fees and complications for both parties.
Understanding a Returned Check
A returned check is commonly called a “bounced check” or “dishonored check.” This occurs when the check writer’s bank refuses to release funds to the person depositing or cashing it. The recipient’s bank sends the check to the writer’s bank for payment. If the writer’s bank cannot honor it, the check “bounces” back.
The check writer is the payer, and the recipient is the payee. When a check is returned, the payee does not receive funds, and the payer’s account is not debited. This triggers actions and potential fees for both. The bank often provides a reason for the return, from technical issues to financial shortfalls.
Common Reasons for a Returned Check
One frequent reason is Insufficient Funds (NSF), meaning the check writer’s account lacks enough money to cover the check’s value. This can happen due to oversight, like forgetting pending transactions or automatic payments, or miscalculating the balance.
Another common cause is a stop payment order, where the check writer instructs their bank not to honor the check. This prevents the check from clearing, regardless of the account balance.
A check may also be returned if the account it was drawn on has been closed, meaning no funds can be disbursed. Checks can become stale-dated if presented too long after being written, typically beyond six months. Conversely, a post-dated check, written with a future date, might be presented early and processed before its specified date.
Other reasons include a signature discrepancy, where the signature does not match the one on file, raising authenticity concerns. Missing or incorrect information, such as an incomplete date, mismatched amounts, or an illegible payee name, can also lead to rejection. These errors prevent the bank’s systems from verifying validity.
Consequences of a Returned Check
When a check is returned, both the writer and recipient typically incur financial penalties. For the writer, their bank imposes a Non-Sufficient Funds (NSF) fee, also known as a returned item fee. These fees vary, often ranging from $10 to $50, with some institutions charging up to $70. If the writer has overdraft protection, the bank might cover the payment but charge an overdraft fee, commonly around $35.
Beyond bank fees, the writer may face charges from the payee, who can impose their own returned check fee, often $20 to $50, depending on jurisdiction. Repeated instances can negatively impact the writer’s banking relationship, potentially leading to account closure. Such closures can be reported to consumer reporting agencies like ChexSystems, making it difficult to open new bank accounts. Intentionally writing a check without sufficient funds can have legal implications, from a misdemeanor to a felony, depending on amount and intent.
For the recipient, the primary consequence is delayed funds, disrupting financial planning. Their bank may also charge a “deposit item returned” fee, averaging around $11. The recipient then needs to pursue alternative payment methods from the writer, which can be inconvenient and time-consuming.
Preventing Returned Checks
To avoid issues with returned checks, both writers and recipients can take proactive steps. Check writers should regularly monitor account balances to ensure sufficient funds before issuing a check. Reconciling bank statements and tracking pending transactions, including automatic payments, helps maintain an accurate understanding of available funds.
It is also important to ensure all check details, such as date, payee name, and numerical and written amounts, are correct and legible. Updating the bank promptly with signature changes can prevent discrepancies.
For recipients, verifying check details before depositing can help identify potential issues. Depositing checks promptly minimizes the risk of them becoming stale-dated or the writer’s account changing. For significant payments or new payees, considering alternative methods like electronic transfers, certified checks, or money orders offers greater security and reduces the risk of a returned item.