What Is the Penalty for Cashing Out Commercial Paper Early?
Commercial paper is simply another word for paper with cash value, such as a check or a promissory note. Checks require a date, and some check writers postdate a check thinking the bank -- or the person to whom the check is made -- cannot cash it until the date printed on a check. However, this isn't always the case.
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Overview
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The most common way commercial paper is cashed out early occurs when a postdated check is presented to a bank and the bank cashes it before the date indicated on the check. A bank incurrs no penalty when it cashes a postdated check early, as it's too difficult for bank employees to manually review the date on every check they receive. Thus, check drafters are responsible for notifying their banks to prevent a postdated check from being cashed early.
Checks and Promissory Notes
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Article 3 of the Universal Commercial Code (UCC) addresses commercial paper. The UCC is not the law itself; rather, it is a set of recommendations adopted by many states. The UCC recognizes checks as drafts that are payable when presented to a bank. Postdated checks are recognized as promissory notes that contain a promise to pay the amount indicated on the check on a specified date.
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Creditors
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Oftentimes, creditors and collection agencies request debtors to submit several postdated checks. If the creditor submits the check early, the bank can cash it without penalty. To protect against this, debtors should refrain from giving postdated checks to creditors. If a creditor does have several postdated checks, the debtor should notify the bank ahead of time and provide check numbers, dates and amounts to prevent the bank from cashing the checks early.
Law
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The Fair Debt Collections Practices Act is a federal law designed to protect debtors from creditors who solicit postdated checks by threatening debtors with criminal prosecution. The act mandates that creditors who accept postdated checks must notify the debtor if they intend to cash a postdated check five days prior to the date indicated on the check. Failing to do so can result in class action law suits, damages and fines up to $1,000.
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References
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