If you don’t have enough money in your checking account, a check you write, which is essentially a financial promise, will bounce. These checks are also known as rubber checks or non-sufficient funds (NSF). Bounced checks can become expensive, and they might even cause your checking account to go to collections. They can also hurt your credit scores for years. Sometimes bouncing checks can cost you a job — or cause you to be prosecuted and arrested.
They occur more frequently today thanks to electronic check clearing, which means banks don’t have to actually process the physical check. Digital substitutes can now be presented instead, so your payment can clear within a few hours instead of a few days. If you know a check is going to bounce, try to prevent it as soon as possible. Transferring funds to your account quickly gives you a chance to save yourself and avoid a bounced check.
There are a lot of ways to bounce a check, including:
- Forgetting to enter a purchase or automatic withdrawal in your checkbook, so you think you have more money in the account than you do.
- Your spouse forgets to tell you they used the debit card that’s tied to your checking account.
- You don’t balance your checkbook.
- You write a check expecting to be able to make a deposit before it clears, or simply knowing 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 thief (or maybe a friend or relative who needs money).
- 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 it bounces. Not only will you likely have to pay a fee for depositing a bad check, but also if you’ve written checks using the money you thought you added, those are likely to bounce, too.
Are Bounced Checks a Felony?
There are different laws in each state that outline regulations for bounced checks, both for civil and criminal penalties. Civil penalties — those that address how much bad check recipients can collect to cover returned check fees and other charges — can often exceed the amount of the original payment.
Under criminal penalties, you can be prosecuted and even arrested for writing a bad check. A bounced check typically becomes a criminal matter when the person who wrote it did so intending to commit fraud like writing several bad checks in a short timeframe. This can be seen as a felony in many states, especially when the checks are for more than $500. If they are less than $500 and there are criminal charges, it is typically seen as a misdemeanor. The majority of bounced check cases do not involve criminal penalties because they are written in error and most people cover the expenses quickly.
Are You Really In Legal 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 on 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 DA (or with approval of the DA). 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.
- Falsely implying that consumers will go to jail if they don’t pay the debt, even though no crime has been committed.
In 2015, the Consumer Financial Protection Bureau (CFPB) took action against a nationwide debt collection group that was using deceptive and illegal intimidation tactics to collect on bounced check debts. Under a law passed by Congress in 2006, which regulated check diversion companies, these companies (under contract with the DA) aren’t allowed to contact consumers until a prosecutor has reviewed the case and deemed the consumer eligible for collection. “The law also requires these companies to inform consumers of certain rights, including their right to dispute allegations of bad check violations,” according the CFPB.
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.
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, you may want to consider getting legal advice, especially if a debt collector tells you that you will be arrested if you don’t pay 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. Your state attorney general’s office can give you information on your state’s statute of limitations for bad checks.
It Adds Up
Banks typically charge a fee for insufficient fund mistakes — Chase Bank, for example, charges $34 for each item. However, you may also be hit with additional charges, like those from the company or person to whom you wrote the check. Target, for example, charges $25 if a check is bounced in their store. Add these fees up and you’re looking at an additional $59 in fees alone.
If a check bounces several times in a short period of time, your bank may pay the largest checks first, which could lead to several of the smaller ones bouncing. That means you’ll pay a lot more in fees, making it much more difficult to catch up on what you owe.
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 you if you overdraft, charging you a convenience fee. But that convenience can come 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 (APR) of 2,000 – 7,000% 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’re 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 history. Additionally, these failed payments 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 that accept checks as payment.
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. If you’ve already been listed in ChexSystems and 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’re eligible to join one.
A few banks may review your credit reports provided by the three main credit bureaus — Experian, Equifax and TransUnion — before allowing you to open an account with them or before approving your request for an overdraft line of credit. If you’re concerned about whether you credit reports will be reviewed if you open an account, be sure to ask about the bank’s policy.
You can see copies of your reports for free once each year by visiting AnnualCreditReport.com. Consider keeping an eye on how your financial choices are affecting your credit by viewing two of your credit scores for free on Credit.com. Reviewing your own credit reports and scores does not affect your credit score in any way.
Doing What You Can
- Consider signing up for an overdraft line of credit, or finding out if you can use your savings account as protection if you accidentally make a payment for more than how much money you have in your account.
- Balance your checkbook, or at least write down transactions and keeping a running total.
- Remember to include recurring debits in your financial tracking.
- Keep extra money in your account to be prepared for emergencies or surprises.
- Monitor your accounts online and set up alerts to come to your email or phone if your balance dips below a certain amount.
Be very careful when writing checks so that you don’t end up losing money — or going to court — by writing bounced checks. If you’re responsible about balancing your checkbook and knowing when you have money to spend, your life will be a lot easier and you can avoid these problems altogether. Always know where your money is coming from and where it’s going. Always watch out for check diversion companies and other disreputable debt collectors. As long as you stay on top of your accounts and your credit, your financial worries will be minimal.
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This article has been updated. It was originally published November 4, 2016.