When you deposit a check into your bank account, your bank sends it to the bank that holds the account on which it was drawn. If the account holder has sufficient funds to cover the check, the bank that holds the account sends the money to your bank, and your bank credits that money to your account. However, if there are not sufficient funds to cover the check, the other bank returns the check to your bank. Every bank has its own procedures for handling returned checks, but in most instances people who write bad checks and people who deposit bad checks end up having to pay penalty fees.
The Federal Reserve facilitates funds transfers between banks. When a bank refuses to honor a check due to the lack of available funds, that bank has to pay an administrative fee to the Federal Reserve for returning the check to the bank that accepted the check deposit. In order to cover those costs and to deter account holders from writing bad checks, banks assess overdraft fees that often exceed $30 for bounced checks. Additionally, the bank that accepted the check for deposit assesses a returned check fee on the person who deposited the check. Returned check fees are usually less than overdraft fees but can still be $20 or $25.
Upon receiving a returned check, most banks make a second attempt to collect payment on the item by sending it back to the bank on which the funds are drawn. In theory, a bank could keep redepositing a bounced check multiple times because neither state nor federal laws limit the number of times that a bank can redeposit an item. However, if the check gets returned unpaid for a second time, most banks do not attempt to collect the funds for a third time; instead, the bank sends the check back to the person who deposited it. The depositor and the check writer have to pay penalty fees each time the check gets returned.
In the past, when you deposited a bad check, your bank returned the actual check to you, but since 2004, most banks sends copies of checks rather than the actual check. The Check 21 Act of 2004 allows banks to convert checks to electronic images in order to speed up the check clearing process and to eliminate costs by reducing paperwork. If a check bounces, the bank prints out a copy of the check image and returns it to the depositor. These check images are valid checks, so you can attempt to redeposit or cash a substitute check.
State laws pertaining to bad checks vary enormously, but in most states you can press charges against anyone who writes you a bad check if he doesn't settle the matter within a certain period of time. If you choose to redeposit the check, your bank can place an extended hold on it that could last for up to seven business days. Federal law allows banks to place these so-called "exception" holds on previously returned checks on the basis that the check has bounced once so it could bounce again.
- Comptroller of the Currency, Administrator of National Banks: Answers About Overdraft Fees and Protection
- Comptroller of the Currency, Administrator of National Banks: Answers About Funds Availability
- The Federal Reserve Board; Consumer Guide to Check 21 and Substitute Checks; April 2004
- Banking Questions; Return Deposit Item; November 2008
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