Writing checks can provide a safe and straightforward way to draft payments from a bank account on demand. Unfortunately, there may be times when a check gets dishonored or returned by the bank. There are a few reasons this can happen, all of which should be avoided when possible.
The negative consequences of dishonored and returned checks can multiply with each occurrence. This can create legal problems, a lower personal credit rating and the bank closing your account.
What Is a Dishonored Check?
The major reason for a dishonored check is non-sufficient funds (NSF) available in the drawee checking account, per the Corporate Finance Institute. Dishonored checks result in returned checks from a depository account. Dishonored checks are not covered for cash or deposit.
Non-sufficient funds are not the only reason a check might be returned, according to the the University of North Texas. In the case of a stop payment order, the check writer contacts the bank to cancel the payment. This results in a returned check that may still be drawn later on.
Insufficient funds are always the reason for a dishonored check. A dishonored check is essentially a “bad” check. Knowingly writing a bad check is considered a crime. There may be real, legal consequences involving law enforcement for passing a bad check.
What If I Write a Bad Check?
There are consequences to knowingly writing bad checks, even for post-dated checks. Banks are under no obligation to abide by post-dating, so it is a weak hedge against a returned check. Knowingly writing a bad check is an act that basically constitutes theft. This is why a bad check is also known as a “hot check.”
Each bank will handle NSF checks in their own way based on the account and internal ordinances that can result in a closed account. If payment of the check is executed with non-sufficient funds then a dishonored check fee may be incurred along with service charges and overdraft charges.
Criminal prosecution is another possible outcome for writing bad checks. For example, if the check is made out for more than $950 in California, it may constitute a felony, explains the Shouse California Law Group. This comes with many expenses and problems in addition to bank penalties.
Writing bad checks can also destroy creditworthiness, negatively impacting your credit score and ability to secure loans. Basically, if your bank knows you write bad checks, they will not lend to you. In fact, they may not want to do business with you at all and close your accounts.
How to Avoid Returned Checks
Writing checks that get returned can result in incurring penalties beyond those imposed by the bank or courts. This should be a special consideration if the payment is to a government entity.
For example, the IRS can assess additional penalties for returned checks used to pay taxes owed. This can result in additional fees totaling up to $25 for checks of $1,250 and less and 2 percent for larger check amounts.
The simplest way to avoid a dishonored check is to keep your checkbook balanced and ensure that sufficient funds are available in the account. If there is a chance that there may be insufficient funds to support a check, another option is to use a money order or cashier’s check.
Using a credit card is not always an option due to processing, but it might help avoid the problem of a returned or dishonored check. Overdraft protection can help avoid dishonored checks, but multiple overdraft charges can also create problems with your bank or credit union.
Hashaw Elkins is a financial services and tax professional, as well as a project management consultant. She has led projects across multiple industries and sectors, ranging from the Fortune Global 500 to international nongovernmental organizations. Hashaw holds an MBA in Real Estate and an MSci in Project Management. She is further certified in organizational change management, diversity management, and cross-cultural mediation.