What is Bounced Check?
Bounced Check is a situation when the processing of dispensed check become unsuccessful by the bank and gets returned without any processing due to various reasons like insufficient funds, signature mismatch, data entered incorrectly, a difference of amount mentioned in numbers etc. and the check stand void between the parties and the bank.
Let’s take the example of Peter. Peter has $50 in total in his savings account maintained with Bank of America. He has to make the payment to Mr Alex for the amount of $75. Now, Peter issues a check to Alex for $75 for the Bank of America.
Alex presented the check issued by Peter in the Bank of America. As the amount in the savings account of Peter is $50 only, and the amount of check is $75, the bank did not process the check, and the check is returned. This non-processing of check due to insufficient funds in Peter account and is referred to as Bouncing of a check.
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Why Check Gets Bounced?
Below are the reasons:
- The insufficient fund is the major reasons when the amount in your bank account is lower as than the amount of the check issued.
- When the data mentioned on the check is found to be incorrect like the name of the account holder, etc.
- Overwriting – If the check is overwritten, it leads to the bouncing of the check.
- Mismatch of signature, i.e. when the signature on the issued check is different than the signature of the account holder as per bank records.
- Damaged check – Due to damage, the check becomes disfigured, and banks do not accept the same.
- Mismatch of Amount – When the amount written in words differs than the amount written in numbers.
When the check gets bounced, the bank sends the “Check return Memo’ to the issuer specifying the reasons of nonpayment. The issuer or the holder of the check can resubmit the check within three months of the date of the return of the Check by the bank. If the issuer fails to make the payment, then the payee has the right to sue the payer legally.
This rule is applicable only if the payer is making some payment and the bank gets bounced due to insufficient funds.
Bounced Check Penalty
When the check dishonours, the bank immediately sends the “Check return Memo” to the issuer specifying the reasons of return of the check. Repeated dishonours of checks attract many penalties and offences under many acts.
According to the legal provisions, the bouncing of the check is the criminal offence, and it can result in imprisonment or with a monetary penalty or with both. Also, credit score gets negatively impacted due to which, one can face many difficulties in acquiring the loan in future.
How to Avoid Check Bounce?
Before issuing any check, the issuer of the check must ensure that they have sufficient amount maintained in their bank account. Also, they should properly go through various reasons that lead to the bouncing of check and verify properly that they’ve correctly entered the inputs and the required information. Also, the check should be handled properly as damaged check also leads to the bouncing of check and the default by the payer.
There is a negative impact:
- A bounced check hampers the credit score of the payee and one can face difficulty in getting a loan in future.
- When bouncing of check continues for any customer repeatedly, the bank can restrict the issuance of the chequebook to that customer.
- If there is any loan active in the bank and the check for the repayment of EMI bounces, the bank has the right to issue a legal notice, and it can also deduct money from the active bank account of the customer.
This has been a guide to Bounced Check and its definition. Here we discuss examples, rules, penalty and why checks get bounced along with how to avoid them. You may learn more about financing from the following articles –