What Is a Returned Check and What Should You Do?
Gain clarity on returned checks. Understand their causes, financial implications, and learn effective strategies for management and prevention.
A returned check occurs when a bank declines to process a check due to various issues, leading to financial complications for both the check writer and the recipient. This common financial event, also known as a bounced check or Non-Sufficient Funds (NSF) check, signifies a failed payment transaction. This article explains what happens when a check is returned and offers guidance on how to navigate such situations.
Understanding Returned Checks
A returned check signifies that the issuer’s bank has refused to honor the payment. This means the funds intended for the recipient are not transferred, and the check is sent back to the depositing bank. The payer’s bank rejects the check because certain conditions for payment are not met.
Checks are returned for several reasons, with insufficient funds being the most common. This occurs when the check writer’s account does not hold enough money to cover the check’s value. Other reasons include:
A stop payment order issued by the account holder.
The account being closed.
A mismatch between the signature on the check and the one on file.
An incorrect date.
An illegible amount.
A missing signature.
Consequences of a Returned Check
A returned check carries repercussions for both the check writer (the issuer) and the recipient. For the issuer, a primary consequence is bank fees, known as Non-Sufficient Funds (NSF) or overdraft fees. These fees typically range from $17 to $35 per returned item. The recipient may also charge their own returned check fee, which can range from $20 to $50, increasing the cost to the issuer.
Frequent returned checks can negatively impact an issuer’s banking relationship, potentially leading to account closure. This history may be reported to consumer reporting agencies like ChexSystems, making it difficult to open new bank accounts. While a single returned check does not directly affect credit scores, if it leads to missed payments on loans or credit cards, those delinquencies can be reported and harm one’s credit. Writing a check with knowledge of insufficient funds and intent to defraud can lead to legal action or criminal charges.
For the check recipient, the immediate consequence is delayed payment, which can disrupt finances or business operations. Their bank may also charge a fee for attempting to deposit a returned item. The recipient must then seek alternative payment from the issuer, incurring additional time and effort. This situation can be inconvenient if the funds were expected to cover other immediate financial obligations.
Responding to a Returned Check
Prompt action is necessary whether you have issued or received a returned check to mitigate further financial impact.
If you are the check issuer, upon notification of a returned check, immediately deposit sufficient funds into your account to cover the original amount and any associated fees. Contact the recipient to explain the situation and arrange for a proper payment method. Many banks allow a check to be re-deposited if funds become available, but communication with the recipient is important to coordinate this.
If you are the recipient of a returned check, contact the issuer to understand the reason for the return and to request a valid payment. If the issue was insufficient funds, re-depositing the check might be an option, but confirm funds availability first. If re-depositing is not feasible, discuss alternative payment methods, such as a wire transfer, cashier’s check, or money order. If direct resolution is not possible, formal demand letters or small claims court may become necessary for collection, depending on the amount and circumstances.
Avoiding Returned Checks
Preventative measures can help both check issuers and recipients avoid the complications of returned checks.
For individuals who write checks, diligent monitoring of bank account balances is important. Regularly checking your account through online banking or mobile apps helps ensure sufficient funds are available before writing a check. Setting up low-balance alerts through your bank can provide timely notifications if your account balance drops below a specified threshold. Maintaining accurate financial records, including all deposits and withdrawals, helps prevent accidental overdrafts. It is also wise to avoid writing checks against unconfirmed or future deposits, as processing delays can lead to a returned check.
For those who receive checks, exercising caution can reduce the risk of accepting a bad check. For larger amounts, consider requesting alternative secure payment methods, such as a cashier’s check, certified check, or money order, which guarantee funds. While not always practical, verifying the validity of a check, especially from a new or unfamiliar payer, can offer an extra layer of protection. For businesses or individuals providing services, confirming payment clearance before fully rendering services or goods can prevent losses associated with returned checks.