Cleared or Unclear
What Really Happens to Your Checks
by Jennifer Barry, GlobalAssetStrategist.com | January 11, 2008Print
I found out a very important piece of information by accident a few months ago, and I wanted to pass it on to you. I deposited a customer's check who shared the same bank as myself. I waited for the check to clear, then mailed her merchandise. A week later, the check was reversed and my account was hit with a bounced check fee. Now, this was an honest mistake by my customer and she quickly sent me another check to cover her purchase plus my fees. However, this could have been a very expensive misunderstanding if she had been unscrupulous.
I asked my branch manager what had happened. After berating me for accepting checks, she explained that �cleared� has two contradictory meanings when used by banking personnel. Tellers will commonly inform you that your deposited checks will �clear� in 3-5 days. That only refers to the time limit until your bank will allow you to use the funds you've deposited.
In reality, the funds you just deposited are not cleared at all. You were given a tentative credit for that sum, but this transaction can be reversed with little notice for up to three years! Government checks are even more uncertain. In my investigation of this phenomenon, a regional branch manager with Wachovia told me that he�s seen an IRS refund check reversed after six years for an �invalid signature.� Apparently, the woman affected had married and changed her name in between filing her taxes and receiving her refund. Multiple bounced check fees were assessed once the amount was abruptly debited from her account.
How can this happen? Checking and other banking actions in the U.S. are covered under the Uniform Commercial Code. (Extremely bored and patient readers can peruse the entire code). In Section � 3-118, the statute of limitations for asserting rights on a bounced check is �three years after dishonor of the draft or 10 years after the date of the draft, whichever period expires first.� This means that a person whose check you deposited this month has until January 2011 to assert that the check was stolen, forged or otherwise invalid. Their bank can insist that your bank refund this illegitimate transfer, and your account will be debited to recover the cost.
Since the passage of the Check 21 Act in 2004, most checks are paid to your bank within hours of deposit. However, it’s to your bank�s benefit to extend the �clearing� period as long as possible. In the meantime, the bank is using your funds while it has a hold on your account. This is called a float, and it’s a very lucrative source of income for banks.
On the flip side, money can be withdrawn from your account the same day you write a check. Consumers used to a grace period have been penalized. In addition, USA Today reports that most of the large banks process your outstanding checks from the largest to the smallest amount, regardless of the order you wrote them in. They claim this is just acceding to customer wishes that the most important checks, like mortgage payments, get paid. However, banks admit this often leads to higher bounced check fees.
Check 21 has other benefits for the banks. As you are probably aware, they can convert checks to digital images which saves them time and money over transporting physical checks. This may generate up to $2 billion per year in savings for U.S. banks. However, these images are not legally equivalent to a cancelled check in a legal proceeding. In order to prove your case, you need to ask specifically for a �substitute check� which your bank may charge an additional fee to provide.
This becomes important if you are ever the victim of check fraud. You may need to prove that your signature was forged or your checks are different from the fraudulent ones. However, you may still be liable for lost or stolen checks if you fail to �exercise ordinary care� of your account (UCC � 3-404). Be wary of employees who have access to your check stock, especially if you have generic, easily reproduced checks. If a merchant cashes one of your stolen or forged checks in good faith and had no way of knowing the check was invalid, you will be held financially responsible, not your bank.
After finding out the facts about checks, I avoid using them as much as possible. If criminals can put your name, address, and checking number together with your Social Security number (like at your doctor�s office) they can steal your identity and write bad checks you may have to cover. In addition, you have much stronger consumer liability protections when using credit or debit cards. It is simple to dispute a charge or other error, and issues are resolved in a few months at most.
In general, I don't recommend accepting checks from people you don't know well in a situation where you have no recourse if the check bounces a few weeks later. For example, I accept checks to pay for subscriptions, but if a reader passes a bad check, I can revoke his or her password. Imagine selling your used car to a private party who you don't know well. You certainly don't want them to stop payment on the check and walk away with your car!
Get Paid, Stay Paid
It has become harder and harder for a U.S. merchant to receive �good funds,� or money that is really paid and cannot be reversed. Counterfeit bank checks are on the rise; PayPal accounts can be arbitrarily �frozen;� and e-gold has been indicted. So what can your business do?
- Accept Cash - Most transactions under $10,000 are not reportable.
- Try Credit Cards - Customers really appreciate the convenience, so look for a low fee account. Chargebacks are a problem but they are much safer than checks.
- Visit The Post Office - Their money orders are unlikely to be counterfeited and there�s no reporting for transactions under $3,000.
- Receive Wires - Bank wires cost more and have the most paperwork, but the near-instant payment is worth it for big ticket items.
Copyright © 2008 Jennifer Barry