Non-sufficient funds
Encyclopedia
Non-sufficient funds is a term used in the banking industry to indicate that a demand for payment (a cheque
) cannot be honored because insufficient funds are available in the account on which the instrument was drawn. In simplified terms, a cheque has been presented for clearance, but the amount written on the cheque exceeds the available balance in the account. An NSF cheque is often referred to as a bad cheque or dishonored cheque, or more colloquially, a bounced cheque, cold cheque, rubber cheque, returned item, or hot check.
But apart from this reason there are many other more minor reasons that cheques may not be honored.
They include:
or criminal
, depending on the amount of the cheque and the laws in the jurisdiction where the cheque is written.
In many jurisdictions in the United States, a Bad Check Restitution Program
exists that allows recipients of bad cheques to collect the funds from the local district attorney's
office, regardless of the amount. An agency run by the district attorney will pursue the writer of the cheque by attempting to collect the funds in exchange for avoiding criminal prosecution. The cheque writer will be responsible to cover the amount of the cheque, plus all fees to which the recipient is legally entitled, plus a program fee. The writer will also be required to take a course designed to improve cheque writing habits. These programs are controversial and in recent years, have come under fire in lawsuits. Normally, if cheque writer can cover up their bad credits in 60 days, all charges will be dropped.
Note that in some places, for a criminal prosecution on a bad check, there must be 'fraud' involved. In some U.S. States, if the check writer informs the party they are uttering the check to that it will not clear at the current time (such as asking someone to 'hold' a check for a few days), if the check bounces, they can still be sued for the value of the check, but warning the recipient before acceptance that the check will not clear immediately negates the element of fraud and prevents criminal prosecution.
A customers ability to dispute/reconcile such fees is heavily restricted, with some banks (such as PNC Bank
), limiting customers to one dispute per year. Once this limit has been reached, it is typically the banks policy to deny any form of restitution, even in cases where the banks' fault is clearly demonstrable.
Banks, as trustee's of their customers money, are also in the semi-unique position of being able to deduct fees from a customer's account directly, without permission from the account owner. In many cases, this deduction may cause further pending transactions to fail, creating an 'overdraft cascade' - a situation in which the fees charged may be several magnitudes greater than would have been charged had the pending transactions been processed before the fees. The instant, and often retroactive, nature of the fees lowers the account balance at the time the pending transactions are processed, creating an additional fee for each instance in which a transaction is attempted. It is not unusual for a dozen or more fees to be applied before a customer realizes that an account is 'empty.'
, such cheques are typically returned marked "Refer to Drawer" - an instruction to contact the person issuing the cheque for an explanation as to why the cheque was not honoured. This wording was brought in after a bank was successfully sued for libel after returning a cheque with the phrase "Insufficient Funds" after making an error - the court ruled that as there were sufficient funds the statement was demonstrably false and damaging to the reputation of the person issuing the cheque. Despite the use of this revised phrase, successful libel lawsuits brought against banks by individuals remained for similar errors.
. He compared the declaration of independence to a bad cheque.
Similarly, the phrase "Don't let your mouth write a cheque your ass can't cash."
(alternatively, "cheques" or "body" (instead of "ass")) is used to mean "Don't make brash boasts you can't back up", and originates in Black English
, likely from mothers' wisdom, being attested since the 1960s, though it is today found more generally, as in the 1993 movie Dazed and Confused
.
Cheque
A cheque is a document/instrument See the negotiable cow—itself a fictional story—for discussions of cheques written on unusual surfaces. that orders a payment of money from a bank account...
) cannot be honored because insufficient funds are available in the account on which the instrument was drawn. In simplified terms, a cheque has been presented for clearance, but the amount written on the cheque exceeds the available balance in the account. An NSF cheque is often referred to as a bad cheque or dishonored cheque, or more colloquially, a bounced cheque, cold cheque, rubber cheque, returned item, or hot check.
Consequences
When a bad cheque is written, the following consequences may occur:- The cheque writer may be charged a fee by his/her own financial institutionFinancial institutionIn financial economics, a financial institution is an institution that provides financial services for its clients or members. Probably the most important financial service provided by financial institutions is acting as financial intermediaries...
. This fee may vary, depending on the bankBankA bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
's policies. - If paying the item puts the account holder in a negative status by a relatively small amount, the bank may choose to honor the cheque . When this occurs, the account will be overdrawn, and the fees charged by the bank will place an extra burden on the account until the overdraftOverdraftAn overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation the account is said to be "overdrawn". If there is a prior agreement with the account provider for an overdraft, and the amount overdrawn is within the authorized overdraft...
is covered. This is a civil matter with the holder's bank and not likely to be subject to outside reporting if settled quickly enough. - If the paying of the item would place the account quite deep in the hole, the bank will likely choose not to honor the cheque. The item will be returned to the depositor's bank, and ultimately to the depositor. The amount of the cheque plus the depositor's bank's fee will be debited from the depositor's account. The depositor then may choose to re-submit the cheque, hoping it will clear on a second attempt, or else proceed immediately with collection activities, civil or criminal.
- If the dishonored cheque has been scanned and replaced by a substitute checkSubstitute checkA substitute check is a negotiable instrument used in the United States to represent the digital reproduction of an original paper check...
, the original cheque is not returned to the depositor, but instead the substitute cheque will be marked "not sufficient funds" and returned to the depositor. - The recipient may choose not to accept cheques in the future from the writer (typically recorded on a paper or electronic "Do not accept checks from..." list), or may suspend the cheque-writer's privileges until the cheque-writer has made good on the debt.
- The recipient may choose to report the writer to a database like Check Connection, TeleCheckFirst DataFirst Data Corporation is an American payment processing company headquartered in Atlanta, Georgia. First Data is a provider of electronic commerce and payment solutions...
, Shared Check Authorization NetworkShared Check Authorization NetworkShared Check Authorization Network is a comprehensive database of bad check writers in the United States. The database is used by retailers in order to reduce the number of bad checks received...
(SCAN), or ChexSystemsChexSystemsChexSystems is an eFunds check verification service and consumer credit reporting agency like Experian, Equifax and TransUnion. While most credit reporting agencies broker data about how a consumer handles credit relationships, ChexSystems provides data related to how a consumer has handled deposit...
. This may lead to other merchants in the future refusing to accept checks from the writer or a joint account holder, or the writer having trouble obtaining a checking account at another bank for several years. - If a merchant or other place of business (particularly small businesses) receives too many bad checks from customers, it may simply decide to not accept any cheques at all from anyone.
Reasons for bad cheques
The reasons for receipt of bad cheques mostly has to do with the party issuing the cheque not having enough funds available in the withdrawal or checking-account.But apart from this reason there are many other more minor reasons that cheques may not be honored.
They include:
- Account holder canceling the cheque i.e. deliberately dishonoring the payment.
- Account is closed. In such a case a fraudulent action might have been taken.
- No Authority to debit. The party owning said account might be under curatorship.
- Account under investigation. Issuing-party may have been involved in previous fraudulent action.
- Account holder deceased. Party issuing cheque might have passed-on before cheque is honored.
- Account frozen. Or effects frozen. Usually happens in divorce when estate is evaluated.
- Authorization cancelled. The issuing-bank took action.
- No such account. Party issuing cheque gave a false instrument or committed a fraudulent act.
Collection on bad cheque
When a bad cheque is negotiated, the recipient of the cheque may choose to take action against the writer. The action that is taken may be civilCivil law (common law)
Civil law, as opposed to criminal law, is the branch of law dealing with disputes between individuals or organizations, in which compensation may be awarded to the victim...
or criminal
Criminal law
Criminal law, is the body of law that relates to crime. It might be defined as the body of rules that defines conduct that is not allowed because it is held to threaten, harm or endanger the safety and welfare of people, and that sets out the punishment to be imposed on people who do not obey...
, depending on the amount of the cheque and the laws in the jurisdiction where the cheque is written.
In many jurisdictions in the United States, a Bad Check Restitution Program
Bad Check Restitution Program
A bad check restitution program is a program that works to retrieve funds from bad check writers in order to repay moneys owed to the recipients of the checks. These programs are run by prosecutors in jurisdictions across the country....
exists that allows recipients of bad cheques to collect the funds from the local district attorney's
District attorney
In many jurisdictions in the United States, a District Attorney is an elected or appointed government official who represents the government in the prosecution of criminal offenses. The district attorney is the highest officeholder in the jurisdiction's legal department and supervises a staff of...
office, regardless of the amount. An agency run by the district attorney will pursue the writer of the cheque by attempting to collect the funds in exchange for avoiding criminal prosecution. The cheque writer will be responsible to cover the amount of the cheque, plus all fees to which the recipient is legally entitled, plus a program fee. The writer will also be required to take a course designed to improve cheque writing habits. These programs are controversial and in recent years, have come under fire in lawsuits. Normally, if cheque writer can cover up their bad credits in 60 days, all charges will be dropped.
Note that in some places, for a criminal prosecution on a bad check, there must be 'fraud' involved. In some U.S. States, if the check writer informs the party they are uttering the check to that it will not clear at the current time (such as asking someone to 'hold' a check for a few days), if the check bounces, they can still be sued for the value of the check, but warning the recipient before acceptance that the check will not clear immediately negates the element of fraud and prevents criminal prosecution.
Prevention
Steps that can be taken to reduce the likelihood of a bad cheque include:- Carrying a higher balance in the checking account; that is to always have a "buffer" amount just in case an unexpected cheque does clear.
- Better balancing techniques
- Overdraft Protection - This may be in the form of a link to a savings accountSavings accountSavings accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money . These accounts let customers set aside a portion of their liquid assets while earning a monetary return...
for which funds will be automatically transferred, a credit cardCredit cardA credit card is a small plastic card issued to users as a system of payment. It allows its holder to buy goods and services based on the holder's promise to pay for these goods and services...
, or a line of credit designed specially for this purpose. - Using a credit/debit card or cash instead of cheques.
Criticism
Despite consumer interest rates being at, historically, an all time low, many banks have moved from a community-investment based profit model to a customer fee based profit model. Many banks do not utilize a readily accessible technology that verifies available funds before accepting a debit or cheque charge. If a charge exceeds the available funds, most banks prefer to charge a fee that typically exceeds 10,000% of the cost of simply denying the charge. Ex. Alliance Bank raised the fee from $28.00 to $35.00 in 2009; 'Overdraft' protection is available starting at $9.99/month. This markup has recently caught the attention of consumer advocates and regulators alike; however, it is important to note that many banks charge the same fee for 'nonsufficient funds' as 'over-drafting', whether or not such 'protection' is enabled. The difference between either fee schedule is purely semantic; the same amount of money may be deducted from the customers account per incident, whether or not overdraft protection is enabled; thus, the only remaining distinction from the end-user's perspective is whether or not the 'bad transaction' is honored.A customers ability to dispute/reconcile such fees is heavily restricted, with some banks (such as PNC Bank
PNC Financial Services
PNC Financial Services Group, Inc. is a U.S.-based financial services corporation, with assets of approximately $264.3 billion...
), limiting customers to one dispute per year. Once this limit has been reached, it is typically the banks policy to deny any form of restitution, even in cases where the banks' fault is clearly demonstrable.
Banks, as trustee's of their customers money, are also in the semi-unique position of being able to deduct fees from a customer's account directly, without permission from the account owner. In many cases, this deduction may cause further pending transactions to fail, creating an 'overdraft cascade' - a situation in which the fees charged may be several magnitudes greater than would have been charged had the pending transactions been processed before the fees. The instant, and often retroactive, nature of the fees lowers the account balance at the time the pending transactions are processed, creating an additional fee for each instance in which a transaction is attempted. It is not unusual for a dozen or more fees to be applied before a customer realizes that an account is 'empty.'
Legal issues
In England and WalesEngland and Wales
England and Wales is a jurisdiction within the United Kingdom. It consists of England and Wales, two of the four countries of the United Kingdom...
, such cheques are typically returned marked "Refer to Drawer" - an instruction to contact the person issuing the cheque for an explanation as to why the cheque was not honoured. This wording was brought in after a bank was successfully sued for libel after returning a cheque with the phrase "Insufficient Funds" after making an error - the court ruled that as there were sufficient funds the statement was demonstrably false and damaging to the reputation of the person issuing the cheque. Despite the use of this revised phrase, successful libel lawsuits brought against banks by individuals remained for similar errors.
Metaphorical use
Martin Luther King used the concept as a metaphor in his speech I have a dreamI Have a Dream
"I Have a Dream" is a 17-minute public speech by Martin Luther King, Jr. delivered on August 28, 1963, in which he called for racial equality and an end to discrimination...
. He compared the declaration of independence to a bad cheque.
Similarly, the phrase "Don't let your mouth write a cheque your ass can't cash."
(alternatively, "cheques" or "body" (instead of "ass")) is used to mean "Don't make brash boasts you can't back up", and originates in Black English
Black English
Black English is a term used for both dialects of English and English-based pidgins and creoles, and whose meaning depends considerably upon the context, and particularly the part of the world.-Africa:*Aku *Cameroon English...
, likely from mothers' wisdom, being attested since the 1960s, though it is today found more generally, as in the 1993 movie Dazed and Confused
Dazed and Confused
"Dazed and Confused" is a song by Jake Holmes, which was covered by The Yardbirds, and later reworked by Led Zeppelin who hold a separate copyright on the song.-Jake Holmes:...
.
External links
- Check Connection
- National Check Fraud Center. Explains the laws pertaining to bad checks in all 50 U.S. states.