What You Need to Know About Bounced Checks

Bounced checks occur when the promise to pay that you’ve signed can’t be processed because you don’t have enough funds in your checking account. They’re also referred to as rubber or non-sufficient funds (NSF) checks and are an expensive hassle that may cause the account you’re trying to pay to go to collections and hurt your credit scores for years to come. Even worse, they can result in criminal prosecution or even cost you the job you want.

They occur more frequently today thanks to electronic check clearing, which means banks don’t have to actually process the physical paper copy. Digital substitutes can now be presented instead, so your payment can clear within a few hours instead of a few days.

There are lots of ways to bounce a check, including:

• Forgetting to enter a purchase or automatic withdrawal in your checkbook, so you think you have more money in the account than you do.
• Your spouse forgets to tell you they used the debit card (tied to your checking account).
• You don’t balance your checkbook.
• You write a check expecting to be able to make a deposit before it clears, or simply knowing you don’t have the money to cover it.
• Your bank or credit union makes a mistake and your account shows less money than it should.
• Your debit card is used by a thief (or maybe a friend or relative who decides they need your money more than you do).
• Your bank indicates a balance that includes available overdraft protection (see below) rather than your actual balance.
• Someone writes a check to you, you deposit it and it bounces. Not only will you likely have to pay a fee for depositing a bad check but, if you’ve written checks using the money you thought you added, they’ll likely bounce.

Is It a Felony to Bounce a Check?

There are different laws in each state that outline what regulations they have for bounced checks, both for civil and criminal penalties. Civil penalties — those that address how much bad check recipients can collect to cover returned check fees and other charges — can often exceed the amount of the original payment.

Under criminal penalties, you can be prosecuted and even arrested for writing a bad check. A bounced check typically becomes a criminal matter when the person who wrote it did so intending to commit fraud — like writing several bad checks in a short timeframe — and this can be seen as a felony in many states, especially when the checks are for more than $500. If they are less than $500 and there are criminal charges, it is typically seen as a misdemeanor. The majority of bounced check cases do not involve criminal penalties, however, as they are done in error and most people cover the expenses quickly.

Are You Really In Legal Trouble?

Consumer advocates have been concerned about the use of “check diversion companies” in some areas of the country. These are private, for-profit companies that are in the business of collecting on bad checks. They may work under a contract with the District Attorney’s (DA’s) office even though they are independent companies. Their collection notices may even seem to come from the DA (or with approval of the DA). These companies have been criticized and sued for:

• Demanding excessive fees (as much as $200 for a $20 bounced check).
• Failing to give consumers the opportunity to dispute the debt.
• Falsely implying that consumers will go to jail if they don’t pay the debt, even though no crime has been committed.

In 2015, the Consumer Financial Protection Bureau (CFPB) took action against a nationwide debt collection group that was using deceptive and illegal intimidation tactics to collect on bounced check debts. Under a law passed by Congress in 2006, which regulated check diversion companies, these companies (under contract with the DA) aren’t allowed to contact consumers until a prosecutor has reviewed the case and deemed the consumer eligible for collection. “The law also requires these companies to inform consumers of certain rights, including their right to dispute allegations of bad check violations,” according the CFPB.

If you don’t believe the amount they are trying to collect is correct, you can ask them to verify the debt. Send a certified letter requesting verification of the debt right away and keep a copy for your records. They must get back to you within 30 days.

You may also be required to participate in a class on financial management. For example, the Los Angeles bad check restitution program requires participation in an eight-hour financial management program.

If you are being strong-armed about a debt related to a bad check, you may want to consider getting legal advice, especially if a debt collector tells you that you will be arrested if you don’t pay on a bounced check immediately. A consumer law attorney can advise you on your rights.

As with any debt, you’ll find there is a state statute of limitations regarding the length of time for collecting on bounced checks. If someone tries to sue you for a bounced check and the statute of limitations has expired, you can raise that in court as a defense. Your state attorney general’s office can give you information on your state’s statute of limitations for bad checks.

It Adds Up

Banks typically charge a fee for insufficient fund mistakes — Chase Bank, for example, charges $34 for each item. However, you may also be hit with additional charges, like those from the company or person to whom you wrote the check. Target, for example, charges $25 if this happens in their store. Add that up and you’re looking at an additional $59 in fees alone.

And if this happens several times in a short period of time, your bank may pay the largest checks first, which could lead to several of the smaller ones bouncing. That means you’ll pay a lot more in fees, making it much more difficult to catch up on what you owe.

Convenience at a Price

Given all these warnings, you may think that the “automatic overdraft protection” some banks offer is a godsend. With these programs, you don’t have to sign up for a line of credit. The bank will simply cover you if you overdraft, charging you a “convenience fee.” But that convenience can come with a steep price.

According to the Center for Responsible Lending and other consumer organizations, the fees these overdraft programs charge rival those of “payday lenders,” who have a reputation of charging outrageous fees. In fact, overdraft protection program fees can result in an equivalent Annual Percentage Rate of 2,000 – 7,000% or more. (And you thought credit card interest rates were high!)

Your Credit May Suffer

Bounced checks don’t usually show up on traditional credit reports, unless you are sued or the balance is turned over to a collection agency. But if you write a check to pay a bill to a company that reports to credit bureaus, and it bounces, the late payment may show up on your credit history. Additionally, these failed payments may be reported to specialized consumer reporting agencies such as ChexSystems or Telecheck. These agencies collect information about how consumers have handled bank accounts and report that information to financial institutions as well as to retailers that accept this form of payment.

Negative information remains in ChexSystems or Telecheck for five years. You have the right to check those reports for free once a year and to challenge any mistakes. To obtain your free annual ChexSystems report, visit Chexhelp.com. To check your Telecheck report, visit Telecheck.com.

If you have already been listed in ChexSystems and you are having trouble opening a bank account, you may need to look for a bank that doesn’t use ChexSystems. You can also try a credit union, if you are eligible to join one.

A few banks may review your credit reports provided by the three main credit bureaus — Experian, Equifax and TransUnion — before allowing you to open an account with them or before approving your request for an overdraft line of credit. If you are concerned about whether you credit reports will be reviewed if you open an account, be sure to ask about the bank’s policy.

You can see copies of your reports for free once each year by visiting AnnualCreditReport.com. You can also keep an eye on how your financial choices are affecting your credit by viewing two of your credit scores for free, updated every 14 days, on Credit.com. Reviewing your own credit reports and scores does not affect your credit score in any way.

Doing What You Can

With all these possible costs and complications, you can see why it is a good idea to avoid this problem. Here are four tips to help you protect yourself.

1. Consider signing up for an overdraft line of credit, or finding out if you can use your savings account as protection if you accidentally make a payment for more than how much money you have in your account.
2. Balance your checkbook, or at least become fanatical about writing down transactions and keeping a running total.
3. Remember to include recurring debits in your financial tracking.
4. Monitor your accounts online and set up alerts to come to your email or cellphone if your balance dips below a certain amount.

Brooke Niemeyer contributed to this article.