Non-sufficient funds

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"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 Check Connection, 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.^[1]

Reasons for bad checks

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 or criminal, 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.

Prevention

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.

Criticism

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 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..

Metaphorical use

Martin Luther King used the concept as a metaphor in his speech I have a dream. He compared the emancipation proclamation to a bad check^[2].

See also

• Bad Check Restitution Program
• Check Fraud
• ChexSystems

References

External links

• National Check Fraud Center. Explains the laws pertaining to bad checks in all 50 U.S. states.