Outstanding Checks: What They Are and Why They Matter
An outstanding check is a check that a recipient fails to deposit. Once such checks are finally deposited, they can cause accounting problems. Furthermore, checks that are never cashed may constitute "unclaimed property" that must be eventually be turned over to the state.
Why Outstanding Checks Matter
When you pay someone by check, your payee must deposit or cash the check to collect the payment. The payee’s bank will request money from your bank, and the transaction concludes when your bank either sends funds to the payee’s bank or transfers money directly to the payee’s account if you both use the same bank or credit union. But if a check is never deposited or if gets destroyed, the money remains in the check-writer’s account.
At first glance, this may seem like a positive turn of events for the check-writer. But in reality, this can cause the following problems down the line:
Inflated account balance: If you write a check and the money never leaves your account, you may develop the false belief that you can spend those funds when the money actually belongs to somebody else. And if the payee finally deposits the check unexpectedly, you risk overdrawing your account and bouncing the check.
Unclaimed assets: Businesses must track outstanding items in order to avoid breaking unclaimed property laws. If payments to employees or vendors remain uncashed, they eventually must turn those assets over to the state—typically after few years, although timetables vary from state to state.
Business accounting: Businesses must track income, expenses, and accounts payable. When payments remain outstanding, complications can arise. The payment goes on the general ledger, but businesses must make adjustments during reconciliation, and they may need to reissue stale checks. Businesses that mishandle these situations are effectively in violation of the law.
What to Do About Outstanding Checks
Be proactive with outstanding checks, in order to remedy situations quickly. After all: You still owe the money, and you’ll have to pay it sooner or later. Use an accounting system that deducts any uncashed checks from your available funds.
Call or write: Call or email payees who fail to deposit checks to see if the check was in fact received and to persuade them to deposit the check. If that doesn’t work, send a letter informing payees that the check has not been presented and officially request that they notify you if they have not received the payment. (See template: Letter for Outstanding Checks.)
Keep records: Document communication regarding outstanding checks in case you need to prove to state regulators that you made reasonable attempts to complete the payment.
Online bill pay: Individuals can reduce surprise withdrawals in personal accounts by using online bill payment of instead of issuing paper checks. The bank simply 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 within six months.
Should You Write Another Check?
After speaking with your payee, they may request another check. But before sending one, ask the payee to return the old check in order to eliminate the possibility that they'll deposit both checks either intentionally or unintentionally.
It may be necessary to issue a new check without getting the old check back if the original check was lost or destroyed. This presents a thorny situation, because that means there may be two checks circulating for a single payment. And if the old check is deposited, your bank might honor it and you could consequently end up paying double. Fortunately, banks generally don’t honor checks written more than six months ago. But just in case, here are two strategies that can protect you if they do:
Stop payment: If the amount is large enough to cause problems, or if you're dubious of the payee, consider asking your bank to stop payment on the old check. But take note: Stop payment requests cost money and they only last for six months, so you may have to make repeated requests.
Seek agreement: Ask the payee to sign a document promising not to deposit both checks (see aforementioned template). While this won’t prevent payees from depositing twice, this reminder can provide a useful paper trail.
Why Checks Aren't Cashed
Checks don’t get deposited for several reasons.
- No urgency: Payees sometimes fail to get around to processing the check. This usually happens when they don't desperately need the cash to make immediate purchases.
- Falling through cracks: Checks get buried under piles of paper or fall behind desks.
- Delivery problems: Checks may be returned to you in the mail if a payee’s address has changed.
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 confirming that the check is lost or destroyed, and you may need to pledge not to deposit both checks. If you cannot find the issuer, consult your state’s abandoned property program to claim assets.