Outstanding Checks: What They Are, and Why They Matter
Outstanding checks are not as great as they sound. They cause accounting nightmares and unexpected hits to bank accounts, and they can result in unclaimed property that must eventually be turned over to the state.
What Is an Outstanding Check?
An outstanding check is a check that has been written but never presented for payment. A person or business writes a check, and the recipient fails to deposit or cash the check.
As a result, so the check is outstanding—it’s still out there somewhere.
Why do Outstanding Checks Matter?
When you pay by check, your payee needs to deposit or cash the check to collect the payment.
The payee’s bank will request money from your bank, and the transaction is complete when your bank sends funds to the payee’s bank (or transfers money to the payee’s account, if you both use the same bank or credit union).
If the recipient of a check never does anything with it—or if the check gets lost or destroyed—the money stays in the checkwriter’s account. While that may seem like a good thing for the checkwriter, several problems arise.
Inflated account balance: If you write a check and the money never leaves your account, you may eventually think that you can spend those funds. But the money belongs to somebody else. If they deposit the check when you’re not expecting it, you’ll end up with less money than you thought, possibly overdrawing your account and bouncing checks.
Unclaimed assets: Businesses need to keep track of outstanding items to avoid breaking unclaimed property laws. If payments to employees or vendors go uncashed, they eventually have to turn those assets over to the state. Most states require businesses to do so after a few years, but check with local regulators for details in your state.
Business accounting: Businesses also need to track income, expenses, and accounts payable. When payments remain outstanding, things get more complicated. The payment goes on the general ledger, but businesses need to make adjustments during reconciliation, and they may need to reissue stale checks. If businesses don’t handle the situation correctly, they’re breaking the law.
What to do About Outstanding Checks
Be proactive about outstanding checks and get things cleared up as soon as possible. Don’t assume that it’s your lucky day and that you get to use the money for other purposes. You still owe the money, and you’ll have to pay it sooner or later—whether it goes to the intended payee or to the state. Use an accounting system that deducts any uncashed checks from your available funds.
Call or write: If you notice that a check has not been deposited, contact the payee. A simple phone call or email is fine—just check in to make sure they received the payment and ask if they’ll deposit the check. If that doesn’t work, it’s a good idea to send a letter informing them that the check has not been presented, and they should notify you if they have not received the payment.
If you need a template, use our sample Letter for Outstanding Checks.
Keep records: Document any communication you send or receive about outstanding checks. You may need to prove to state regulators that you made reasonable attempts to complete the payment, but the payee either didn’t cooperate, or it was impossible to contact the payee.
Online bill pay: As an individual, you can reduce “surprise” withdrawals in your personal account by using online bill payment instead of writing checks: The bank deducts funds from your checking account when the check is printed. But the funds will be returned to your account if the payee fails to deposit the check within a certain amount of time (typically six months or less).
Should you Write Another Check?
After speaking with your payee, they may request that you send another check, which they’ll promise to deposit promptly.
Before doing so, ask them to return the old check, if possible. This eliminates the possibility that they will (intentionally or unintentionally) deposit both checks.
It may be necessary to issue a new check without getting the old check back. The check may have disappeared for whatever reason, and your payee needs a new one. This puts you in a tricky situation because you will have two checks out for a single payment. If the old check gets deposited, your bank might honor the check, and you end up paying double. Banks generally won’t honor checks written more than six months ago, but it happens often enough that you should be careful (even if you print “Void after 90 days” or something similar on your checks).
Two strategies can protect you:
Stop payment: If the amount is large enough to cause problems (or if you don’t trust the payee), consider asking your bank to “stop payment” on the old check. This approach is not perfect, but it can help protect you. Stop payment requests cost money, and they only last for six months, so you may have to repeat the process several times.
Get agreement: Ask the payee to sign a document promising not to deposit both checks (the sample letter linked to above contains this language). That won’t prevent the payee from depositing twice, but it adds a reminder and a paper trail that may be useful.
Why Don’t Checks get Cashed?
Checks don’t get deposited for several reasons.
- No rush: The simplest reason may be that the payee just hasn’t gotten around to processing the check. Maybe they don’t need the cash urgently, and they’ve been busy doing other things.
- Falling through cracks: Checks can also get lost in piles of paper or fall behind desks. Again, if the money is not important to the payee, it doesn’t get noticed.
- Delivery problems: Finally, checks may be returned to you in the mail if a payee’s address has changed, but that process can take surprisingly long.
Checks Issued to You
If a check was issued to you and it’s still outstanding after six months, contact the check issuer and request a replacement. You may need to return the original check or sign documents saying that the check is lost or destroyed (and that you won’t try to deposit both checks). If you can’t find the issuer, check with your state’s abandoned property program to claim assets.