"Non-sufficient funds" (NSF)
is a term used in the banking
industry to indicate that a demand for payment (a check
) cannot be honored because insufficient funds are available in the account on which the instrument was drawn. In simplified terms, a check has been presented for clearance, but the amount written on the check exceeds the available balance in the account. It is often colloquially referred to as a bad check
, a "bounced" check
, or a rubber check
. Businesses frequently use the term dishonored check.
Consequences of writing a bad check
When a bad check is written, the following consequences may occur:
- The check writer may be charged a fee by his/her own financial institution. This fee may vary, depending on the bank's policies.
- If paying the item puts the account holder in arrears by a relatively small amount, the bank may choose to honor the check. 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 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 check. The item will be returned to the depositor's bank, and ultimately to the depositor. The amount of the check plus the depositor's bank's fee will be debited from the depositor's account. The depositor then may choose to re-submit the check, hoping it will clear on a second attempt, or else proceed immediately with collection activities, civil or criminal.
- The recipient may choose not to accept checks in the future from the writer (typically recorded on a paper or electronic "Do not accept checks from..." list), or may suspend the check-writer's privileges until the check-writer has made good on the debt.
- The recipient may choose to report the writer to a database like TeleCheck, Shared Check Authorization Network (SCAN) or ChexSystems. 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 checks at all from anyone.
Reasons for bad checks
Bad checks are written for a variety of reasons. These may include:
- Personal lacking of organizational skills - The writer of the check does a poor job at balancing his/her checkbook or keeping good track of funds contained in the account.
- Lack of Communication - In a joint checking account, the parties do not consistently share information about checks written, withdrawals made, or check-card purchases made, leading one to believe that funds spent by the other are present.
- Slow clearing of deposits - The writer of the check deposits a sum of money and later writes a check for a smaller amount. Although the checkbook balances, a bad check may result if the check clears before the bank makes the money available.
- Temporary Hold - Some funds in the account have been placed on hold by the bank. These may include deposits that must be given time to clear, or after certain debit card transactions, for which a greater amount is put on hold. The account holder believes these funds are available, and as a result, checks may be dishonored and NSF penalties may be charged.
- Unexpected electronic withdrawals - at some point in the past, possibly years ago, the account holder authorized electronic withdrawals by a business. If the business makes a large withdrawal without warning the accountholder, it may leave insufficient funds to cover a check that was previously written. This could occur in good faith of both parties if the electronic withdrawal in question is made legally possible by terms "buried" in the contract. The debit could also have been made as a result of a wage garnishment, an offset claim for a taxing agency or a credit account or overdraft with another account with the same bank, or a direct-deposit chargeback in order to recover an overpayment.
- Chargeback to merchant - A merchant could receive a chargeback because of making an unauthorized credit or debit card charge to a customer or a customer making an unauthorized credit or debit card charge to someone else's account in order to "pay" for goods or services from the merchant. It is possible for the chargeback and associated fee to leave insufficient funds to cover a check written from the merchant's account that received the debit.
- Bank reordering of transactions - The account holder writes a small check for which there are sufficient funds in his or her account. Later, the account holder makes a large withdrawal that overdraws the account (either accidentally or intentionally). The bank reorders the transactions and processes the large withdrawal first, leaving insufficient funds to cover the check.
- Playing the Float - The account holder writes a check while insufficient funds are present in the account, but believing s/he will be able to deposit sufficient funds before the check clears (known as beat the bank).
- Returned check deposit - The account holder deposits a check or money order and the deposited item is returned due to NSF, a closed account, or being discovered to be counterfeit, stolen, altered, or forged. As a result of the check chargeback and associated fee, the account holder's bank returns a check that he wrote which was reliant on such funds. This could be due to a deposited item that he knows to be bad, or he could be a victim of a bad check or a counterfeit check scam.
- Intentional Fraud - The account holder knowingly writes a check for an amount not contained within the account, absent of the expectation of receiving such funds prior to the clearing of the check, or in the case of pathological gamblers, the expectation is contingent upon winning. This practice is known as "paper hanging." The fraud can also be a check kiting scheme, in which the returned check(s) can leave a huge criminal overdraft with the account that it is returned to.
- Bank Error - Sometimes a bank employee misreads the handwritten amount on a check, so an amount much larger than the writer intended to write the check for will actually be removed from the account. On other occasions, a computer glitch could be responsible for a check not clearing. There are also other types of bank errors which can work to the account holder's detriment, but others that could work to his initial benefit. In the latter case, the bank will correct its own error with the appropriate debit. If a check is written dependent on such funds and the error is discovered before the check is processed, the check could bounce.
- Victimization - The account, unbeknownst to its holder, has been robbed or cleaned out by a thief, and the balance is therefore less than what s/he believes it to be. This could occur as the result of check forgery, demand-draft or debit-card fraud, theft associated with a rigged ATM machine, an "account takeover," or phishing. The money or checks from an ATM deposit intended to cover a near-future check could also have been stolen or lost, and if the chargeback occurs before the check clears, it may result in the return of a check reliant on such funds.
- Account closure - The account of the holder is closed by the bank or frozen by a government agency with or without his knowledge before the check from the account clears, resulting in the return of the check. Although this is technically not an example of an NSF check return, the funds would have been available to cover the check if not for the closure or freeze of the account.
- Counterfeit - The check writer creates a counterfeit check. This might appear to be a check drawn on a real account belonging to another entity, or a check drawn on a fictitious account, or have the appearance of being a cashier's check.
Collection on bad checks
When a bad check is negotiated, the recipient of the check may choose to take action against the writer. The action that is taken may be civil
, depending on the amount of the check and the laws in the jurisdiction where the check is written.
In many jurisdictions, a Bad Check Restitution Program exists that allows recipients of bad checks 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 check by attempting to collect the funds in exchange for avoiding criminal prosecution. The check writer will be responsible to cover the amount of the check, 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 check writing habits. These programs are controversial and in recent years, have come under fire in lawsuits.
Steps that can be taken to reduce the likelihood of a bad check include:
- Carrying a higher balance in the checking account; that is to always have a "buffer" amount just in case an unexpected check does clear.
- Better balancing techniques
- Overdraft Protection - This may be in the form of a link to a savings account for which funds will be automatically transferred, a credit card, or a line of credit designed specially for this purpose.
- Using a debit card instead of checks will typically withdraw the funds immediately, and will automatically reject the purchase (with no penalty) if there are not enough funds in the card's account.
With consumer interest rates 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 check charge. If a charge exceeds the available funds, most banks prefer to charge a fee that typically exceeds 10000% of the cost of simply denying the charge. This markup has recently caught the attention of consumer advocates and regulators alike.