Non-sufficient funds (NSF) is a term used in the banking industry to indicate that a cheque is not being honoured (ie., paid) because insufficient cleared funds are in the account on which the cheque was drawn. An NSF check is often referred to as a bad check, dishonored check, bounced check, cold check, rubber check, returned item, or hot check. In England and Wales and Australia, such cheques are typically returned endorsed "Refer to drawer", an instruction to contact the person issuing the cheque for an explanation as to why it was not paid. If there are funds in an account, but insufficient cleared funds, the cheque is normally endorsed “Present again”.
When more than one cheque is presented for payment on the same day, and the payment of both would result in the account being overdrawn (or below some approved credit limit), the bank has a discretion as to which cheque will be paid and which dishonoured. The bank cannot partially pay on a cheque, so that it must either pay the cheque in full or dishonour it. If a bank declines to pay a cheque, it must return the cheque to the person who deposited the cheque or presented it to be cashed. A bank has a general discretion whether or not to pay the cheque in such circumstances, but such payment on one occasion does not bind the bank to do so again on another occasion.
Reasons for dishonour
Cheques may be dishonoured by a financial institution because there are insufficient cleared funds in the account to cover the cheque. Other reasons for not honoring a cheque include:
- the account holder deliberately cancels the cheque in order to withhold payment, called a stopped cheque,
- the account holder's funds are frozen,
- the account not actually existing due to a false cheque being presented,
- the date of the cheque is outside the permitted period,
- the signature on the cheque is not the same as the signature on file of the account holder or an authorised signatory on the account, or
- the cheque is damaged.
Among the consequences of issuing a NSF cheque are actions by financial institutions, civil liability to the drawee, and possible criminal penalties. When a bad cheque is negotiated, the recipient of the cheque may choose to take action against the drawer. The action that is taken may be a civil collection action or lawsuit, or seeking criminal charges, depending on the amount of the cheque and the laws in the jurisdiction where the cheque is drawn.
When a bad cheque is drawn, the cheque writer may be charged a fee by their financial institution. If paying the item puts the account holder in a negative status by a relatively small amount, the bank may choose to honor the cheque. 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. If the paying of the item would render the account significantly overdrawn, the bank may choose not to honor the cheque. 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 cheque, hoping it will clear on a second attempt, or else proceed immediately with collection activities, civil or criminal.
If the dishonored check has been scanned and replaced by a substitute check, the original check is not returned to the depositor, but instead the substitute check will be marked "not sufficient funds" and returned to the depositor. 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 also choose to report the writer to a database service. 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. If a merchant or other place of business receives too many bad checks from customers, it may simply decide to not accept any checks at all from anyone.
In some cases the issuance of a NSF check may result in criminal prosecution of the drawer of the check. Criminal charges are more likely where the drawer can be shown to have issued the check knowing that it would not be honored. Charges are also more likely when the NSF check is for a large amount, or where the drawer issues multiple NSF checks.
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 from which funds will be automatically transferred, a credit card, or, a line of credit designed specially for this purpose.
- Using a credit/debit card or cash instead of checks.
In India, a bounced check is a criminal offense, punishable by fines and/or jail term, under Section 138 of the Negotiable Instruments Act, 1881. Until January 2013, a bounced check was a criminal offense in the United Arab Emirates that led to imprisonment of the person who wrote it.
In many jurisdictions in the United States, 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 drawer of the check by attempting to collect the funds in exchange for avoiding criminal prosecution. The check drawer 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 drawer 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. Normally, if check writer can cover up their bad credits in sixty days, all charges will be dropped.
In some jurisdictions, for a criminal prosecution on a bad check there must be some element of fraud involved in the issuance of the check. In some U.S. states, if the check drawer informs the party they are uttering the check to that it will not clear at the current time (such as asking someone to “hold” a check for a few days), if the check bounces, they can still be sued for the value of the check, but warning the recipient before acceptance that the check will not clear immediately negates the element of fraud and prevents criminal prosecution. For similar reasons, a post-dated check will not normally support a conviction for issuing a NSF check.
Use of the term "Refer to Drawer" became standard in England and Wales after bank was successfully sued for libel after returning a cheque with the phrase "Insufficient Funds" after making an error; the court ruled that, as there were sufficient funds, the statement was demonstrably false and damaging to the reputation of the person issuing the cheque. Even with the use of this revised phrase, the mere implication that funds were insufficient has been ruled to be libelous in other cases of banks mistakenly refusing to pay cheques.
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- National Check Fraud Center. Explains the laws pertaining to bad checks in all fifty U.S. states.