Before I went on vacation a few years ago, I wrote a large check to pay a bill before the money was in that account. My plan was to stop by the bank before I left to deposit a check from another account to cover it. But in the rush to leave, I overlooked that item on my to-do list.
I was lucky. The check was written to an out-of-state company and it didn’t clear in the week I was gone. I was able to deposit the money when I returned and avoid a bounced check.
But today my forgetfulness might have cost me a small fortune – or worse. It may have ended up in collections and hurt my credit scores for years to come.
Bounced checks (a.k.a. “rubber” or “non-sufficient funds” — NSF — checks) are an expensive hassle at best. At worst, they can result in criminal prosecution or even cost you the job you want.
They occur more frequently today thanks to electronic check clearing, which means banks don’t have to actually process your physical check. Digital “substitute checks” can now be presented instead. That means checks can clear within a few hours instead of a few days.
There are lots of ways to bounce a check:
- You forget to enter a check, debit purchase, or automatic withdrawal in your checkbook and think you have more money in the account than you do.
- Your spouse forgets to tell you that he or she used the debit card.
- You don’t balance your checkbook.
- You write a check knowing that you don’t have the money to cover it.
- Your bank or credit union makes a mistake and your account shows less money than it should.
- Your debit card is used by a crook (or maybe a friend or relative who decides they need your money more than you do).
- Your bank indicates a balance that includes available overdraft protection (see below) rather than your actual balance.
- Someone writes a check to you, you deposit it, and their check bounces. You’ll probably pay a fee to your bank for depositing the bad check, and if you’ve written checks against that balance, your checks will bounce.
You write a check expecting to be able to make a deposit before it clears.
The Legal Issues
State laws address the penalties for writing bad checks. There are generally two types of penalties for NSF checks: civil and criminal. Civil penalties address how much the recipient can collect after receiving a bad check. In some states, this can be much more than the amount of the bad check, and may include double or triple the amount of the check plus attorney fees and damages.
Under criminal penalties, you can be prosecuted and even arrested for writing a bad check. Bounced checks typically become criminal matters when there is an intent to defraud on the part of the person writing the check. The majority of bounced check cases do not involve criminal penalties, as most people cover a bad check as soon as possible.
Are You Really In Trouble?
Consumer advocates have been concerned about the use of “check diversion companies” in some areas of the country. These are private, for-profit companies that are in the business of collecting bad checks. They may work under a contract with the District Attorney’s (DA’s) office even though they are independent companies. Their collection notices may even seem to come from the D.A. (or with approval of the D.A.). These companies have been criticized and sued for:
- Demanding excessive fees (as much as $200 for a $20 bounced check),
- Failing to give consumers the opportunity to dispute the debt, and
- Falsely implying that consumers will go to jail if they don’t pay the debt, even though no crime has been committed.
In 2006, Congress passed a law regulating check diversion companies. If a check diversion company is under contract with the District Attorney, it is not covered by the Fair Debt Collection Practices Act, which regulates outside debt collection agencies. However, this doesn’t give these companies free rein to say or do anything to collect. If you don’t believe the amount they are trying to collect is correct, you can ask them to verify the debt. Send a certified letter requesting verification of the debt right away and keep a copy for your records. They must get back to you within 30 days.
If your check is picked up by one of these check diversion companies, you will likely get a letter threatening penalties and possible criminal prosecution if you don’t make good on the check quickly as well as pay fees and penalties. (The District Attorney offices they partner with receive some of that revenue.) You may also be required to participate in a class on financial management. For example, the Los Angeles bad check restitution program requires participation in an eight-hour financial management program.
If you are being strong-armed about a debt related to a bad check, consider getting legal advice, especially if a debt collector tells you that you will be arrested if you don’t pay up on a bounced check immediately. A consumer law attorney can advise you on your rights.
As with any debt, you’ll find there is a state statute of limitations regarding the length of time for collecting on bounced checks. If someone tries to sue you for a bounced check and the statute of limitations has expired, you can raise that in court as a defense and the accuser would likely be unsuccessful. Your state attorney general’s office can give you information on your state’s statute of limitations for bad checks.
It Adds Up
The average bounced check fee is over $27, according to Bankrate.com. That’s just the fee you pay to the bank; you could be on the hook for another $25 or more to the company or person that deposited your rubber check. One check could set you back $50 in fees alone!
But it gets worse. If your bank receives several checks on the same day against your account, it may pay the largest checks first, which leads to more of the smaller ones bouncing. That means you pay a lot more in fees, and it is much more difficult to catch up.
Convenience at a Price
Given all these warnings, you may think that the “automatic overdraft protection” some banks offer is a godsend. With these programs, you don’t have to sign up for a line of credit. The bank will simply cover your bad check and charge you a “convenience fee.” But that convenience comes with a steep price. According to the Center for Responsible Lending and other consumer organizations, the fees these overdraft programs charge rival those of “payday lenders,” who have a reputation of charging outrageous fees. In fact, overdraft protection program fees can result in an equivalent Annual Percentage Rate of 2000 – 7000% or more. (And you thought credit card interest rates were high!)
Your Credit May Suffer
Bounced checks don’t usually show up on traditional credit reports, unless you are sued or the balance is turned over to a collection agency. But if you write a check to pay a bill to a company that reports to credit bureaus, and it bounces, the late payment may show up on your credit. Additionally, bounced checks may be reported to specialized consumer reporting agencies such as ChexSystems or Telecheck. These agencies collect information about how consumers have handled bank accounts and report that information to financial institutions as well as to retailers who accept checks.
Negative information remains in ChexSystems or Telecheck for five years. You have the right to check those reports for free once a year and to challenge any mistakes. To obtain your free annual ChexSystems report, visit Chexhelp.com. To check your Telecheck report, visit Telecheck.com.
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If you have already been listed in ChexSystems and you are having trouble opening a bank account, you may need to look for a bank that doesn’t use ChexSystems. You can also try a credit union if you are eligible to join one.
A few banks may check a standard credit report before opening a bank account, or they may check your credit if you request an overdraft line of credit. If you are concerned about whether you credit report will be reviewed if you open an account, be sure to ask about the bank’s policy.
In addition to these specialty consumer reports, you will want to monitor your free credit score. A significant change in your score in any given month will alert you to take a closer look.
With all these possible costs and complications, you can see why it is important to make sure you don’t bounce a check. Here’s how to protect yourself:
- Sign up for an overdraft line of credit, or find out if you can use your savings account as protection if you accidentally write a check and there is not enough money in your account.
- Balance your checkbook, or at least become fanatical about writing transactions in your checkbook and keeping a running total.
- Remember to enter recurring debits in your checkbook.
Monitor your accounts online and set up online alerts to your email or cell phone if your balance dips below a certain amount.
Find Out Where You Stand
You can check your credit score each month using Credit.com’s free Credit Report Card. This completely free tool will break down your credit score into sections and give you a grade for each. You’ll see, for example, how your payment history, debt and other factors affect your score, and you’ll get recommendations for steps you may want to consider to address problems. In addition, you’ll also find credit offers from lenders who may be willing to offer you credit. Checking your own credit reports and scores does not affect your credit score in any way.
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