Returned checks: Overview, definition, and example
What are returned checks?
Returned checks refer to checks that a bank refuses to process or honor due to issues such as insufficient funds, a closed account, or a mismatch in account details. When a check is returned, it typically means the issuer's bank has rejected the payment for one reason or another. This situation can result in penalties or fees for both the issuer and the recipient. In most cases, the payee is notified of the returned check and may seek alternative payment methods from the payer.
For example, if a person writes a check for goods or services but does not have enough money in their account to cover the payment, the bank may return the check, marking it as "insufficient funds" or "NSF" (Non-Sufficient Funds).
Why are returned checks important?
Returned checks are important because they represent a failure to complete a financial transaction. For the party receiving the check, this can cause delays in payments and potential financial losses, particularly if the check was relied upon for business operations or personal payments. For the issuer, a returned check can result in penalties, fees from the bank, and damage to their credit or reputation.
For businesses, managing the risk of returned checks is essential to maintaining cash flow and reducing the impact of non-payment. For individuals, understanding the consequences of issuing a returned check, including potential fees and legal implications, can help prevent financial issues.
Understanding returned checks through an example
Imagine a small business receives a check for $500 from a customer. The business deposits the check, but when it is processed by the bank, it is returned due to insufficient funds in the customer’s account. The business is notified that the check has been returned, and they may now need to contact the customer to arrange for an alternative form of payment, such as cash or credit. The business may also charge the customer a returned check fee.
In another example, an individual writes a check to pay for a service, but the check is returned because the account was closed. The service provider may contact the individual to request a different payment method and could charge a fee for the returned check.
Example of a returned check clause
Here’s how a returned check clause might appear in a contract or agreement:
"If any check issued by the Customer is returned due to insufficient funds or any other reason, the Customer agrees to pay a returned check fee of [$amount] and will provide an alternative form of payment within [specified time frame]. In addition, the Seller reserves the right to suspend services or delivery until payment is received in full."
Conclusion
Returned checks represent a financial setback and can lead to significant consequences for both the payer and the payee. It’s important for individuals and businesses to understand the causes of returned checks, how to manage them, and how to protect themselves through policies that address returned payments.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.