Learn About Bounced Checks
How to Avoid Rubber Checks (And Fees)
A bounced check is a check that was used for payment, but the check could not be processed because the check writer did not have sufficient funds available to fund the payment.
When an account has insufficient funds, the check writer’s bank will reject the payment request and return the check (or the electronic request) to the payee’s bank. Instead of sending money to the payee, the request for payment “bounces” back.
Why Checks Bounce
When people pay by check, there is trust involved: No cash changes hands immediately, and it will take several days for the funds to move from one account to the other. The payee (or recipient of the check) doesn’t really know how much money the check writer has available for spending, but most customers don’t make a habit of bouncing checks, so checks are often accepted on faith.
In other words, merchants and service providers accept checks assuming the checks will clear without any problems.
You can write anything: It’s possible to write a check for any amount you want, whether or not those funds are really available for spending in your checking account. Writing rubber checks intentionally is generally illegal, and a bad idea for numerous reasons, but it's easy to do.
Accidents happen: Sometimes checks bounce by accident. A check writer might believe he has funds available, but withdrawals reduce his balance and catch him by surprise. For example, automatic electronic payments, outstanding checks that hit an account unexpectedly, and large debit card holds can cause checks to bounce. Plus, sometimes people just forget to make deposits or check their account balance.
Problems with the account or the check: Checks can bounce for a variety of other reasons.
- Closed accounts: If the checking account was closed for any reason, checks will be rejected. In some cases, this is a sign of fraud, and it can also happen when payees are slow to deposit checks.
- Stop payment: If the check writer placed a stop payment on the check, the bank should honor that request. In those cases, payees need to find out why the request was made and make arrangements for an alternative form of payment.
- Issues with the check: Banks can refuse to honor a check if there’s anything suspicious. Common problems include missing signatures and stale-dated checks, but other issues can cause banks to flag a check.
When a bad check is deposited or the payee attempts to cash it, the check goes to the check writer's bank (in paper or electronic form). The bank will verify if the checking account has funds available, and the bank will pay the check if all is well. If there are any problems, the bank will provide a brief description and return the request to the payee’s bank.
Fees, Fees, Fees
Rubber checks lead to fees — for everybody involved.
- If you write a bad check, your bank will charge you fees for insufficient funds or overdrawing your account. Those fees are typically around $35 or so. In addition, the person or business you wrote the check to may also charge penalty fees or late payment fees.
- If you receive a check that bounces, you’ll also have to pay. Your bank will ding you for depositing a bad check — even though it wasn’t your fault. Those fees are often in the ballpark of $35. In some cases, you can pass those charges on to the check writer, but you have to follow certain rules to collect those funds from the check writer (and you never know if you’ll get anything, including the original payment, from a customer who writes a bad check).
Avoid Bounced Checks
Both check writers and check recipients can take steps to prevent checks from bouncing.
Check writers need to ensure that they have sufficient funds available for every check they write.
- Know your balance: Check your available balance (which might be different from your account balance) often. Use personal finance apps and text messages with your bank to understand when money leaves your account.
- Keep a buffer: Leave extra money in your checking account for unexpected expenses. That money can help when you forget about payments that hit your account, and when you need cash for an emergency. If you constantly keep your account balance just above zero, you’re more likely to pay overdraft charges and use expensive loan products.
- Balance your account: Keep track of your account balance, deposits, and withdrawals. If you balance your accounts, you’ll know what’s going on in your account before your bank does. You’ll have time to make deposits or transfer funds to avoid bouncing checks and paying penalty fees.
- Communicate with payees: If you write a check and you later realize that it's going to bounce, contact the payee immediately. Let them know before they deposit the check, and make other arrangements. This will save time and money for both of you.
Check recipients always take a risk by accepting checks, but it’s possible to manage those risks.
- Verify funds: Contact the check writer’s bank to verify funds before you accept or deposit a check. Some banks will cooperate, but others will not provide any information about customer accounts. You won’t know unless you try.
- Check verification services: Businesses can use databases that track checking accounts and help to identify checks that are likely to bounce. They might even guarantee payment on bad checks for an extra fee.
- Processes: Be selective about who you accept checks from. For some businesses, the risk is worth it, and you can profitably serve more customers by taking checks (as opposed to requiring credit cards or going cash only). But it’s worth following best practices if you’re going to accept checks.