Non-sufficient funds (NSF) is a term used in the banking industry to indicate that a demand for payment (a cheque) cannot be honored because insufficient funds are available in the account on which the instrument was drawn. In simplified terms, a cheque has been presented for clearance, but the amount written on the cheque exceeds the available balance in the account. An NSF cheque is often referred to as a bad cheque or dishonored cheque, or more colloquially, a bounced cheque, cold cheque, rubber cheque, returned item, or hot check.
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When a bad cheque is written, the following consequences may occur:
The reasons for receipt of bad cheques mostly has to do with the party issuing the cheque not having enough funds available in the withdrawal or checking-account. But apart from this reason there are many other more minor reasons that cheques may not be honored. They include:
When a bad cheque is negotiated, the recipient of the cheque may choose to take action against the writer. The action that is taken may be civil or criminal, depending on the amount of the cheque and the laws in the jurisdiction where the cheque is written.
In many jurisdictions in the United States, a Bad Check Restitution Program exists that allows recipients of bad cheques 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 cheque by attempting to collect the funds in exchange for avoiding criminal prosecution. The cheque writer will be responsible to cover the amount of the cheque, 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 cheque writing habits. These programs are controversial and in recent years, have come under fire in lawsuits. Normally, if cheque writer can cover up their bad credits in 60 days, all charges will be dropped.
Note that in some places, for a criminal prosecution on a bad check, there must be 'fraud' involved. In some U.S. States, if the check writer 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.
Steps that can be taken to reduce the likelihood of a bad cheque include:
Despite consumer interest rates being 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 cheque 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; however, it is important to note that many banks charge the same fee for 'nonsufficient funds' as 'over-drafting', whether or not such 'protection' is enabled. The difference between either fee schedule is purely semantic; the same amount of money may be deducted from the customers account per incident, whether or not overdraft protection is enabled; thus, the only remaining distinction from the end-user's perspective is whether or not the 'bad transaction' is honored.
A customers ability to dispute/reconcile such fees is heavily restricted, with some banks (such as PNC Bank), limiting customers to one dispute per year. Once this limit has been reached, it is typically the banks policy to deny any form of restitution, even in cases where the banks' fault is clearly demonstrable.
Banks, as trustee's of their customers money, are also in the semi-unique position of being able to deduct fees from a customer's account directly, without permission from the account owner. In many cases, this deduction may cause further pending transactions to fail, creating an 'overdraft cascade' - a situation in which the fees charged may be several magnitudes greater than would have been charged had the pending transactions been processed before the fees. The instant, and often retroactive, nature of the fees lowers the account balance at the time the pending transactions are processed, creating an additional fee for each instance in which a transaction is attempted. It is not unusual for a dozen or more fees to be applied before a customer realizes that an account is 'empty.'
In England and Wales, such cheques are typically returned marked "Refer to Drawer" - an instruction to contact the person issuing the cheque for an explanation as to why the cheque was not honoured. This wording was brought in after a 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. Despite the use of this revised phrase, successful libel lawsuits brought against banks by individuals remained for similar errors.[3]
Martin Luther King used the concept as a metaphor in his speech I have a dream. He compared the declaration of independence to a bad cheque.[4]
Similarly, the phrase "Don't let your mouth write a cheque your ass can't cash." (alternatively, "cheques" or "body" (instead of "ass")) is used to mean "Don't make brash boasts you can't back up", and originates in Black English, likely from mothers' wisdom, being attested since the 1960s,[5] though it is today found more generally, as in the 1993 movie Dazed and Confused.
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