Non-sufficient funds (NSF) is a term used in the banking industry to indicate that a cheque cannot be honored because insufficient funds are available in the account on which the instrument 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.
When a bad check is written, the check writer may be charged a fee by their own 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 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. If the paying of the item would render the account significantly overdrawn, the bank may 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.
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.
Reasons for dishonored checks
The reasons for receipt of bad checks mostly relate to the party issuing the check not having sufficient funds available in the amount presented for withdrawal from the checking account. Other reasons that checks may not be honored include the account holder cancelling the check to deliberately withhold payment; the account holder's funds being frozen; the account not actually existing due to a false check being presented; and damage to the check.
Collection on dishonored 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 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 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. Normally, if check writer can cover up their bad credits in sixty 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 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 England and Wales and Australia, such checks are typically returned marked "Refer to Drawer" - an instruction to contact the person issuing the check for an explanation as to why the check was not honored. This wording was brought in after a bank was successfully sued for libel after returning a check 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 check. 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 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.
Another example is the phrase "Don't let your mouth write a check your ass can't cash." (alternatively, "checks" or "body" (instead of "ass" (alteratively, "bum" or "arse" (with "drum" or "grass" to continue the rhyme))) is used to mean, "Don't make brash boasts you can't back up," and originates in urban English, being attested since the 1960s, though today it's found more generally, as in the 1993 movie Dazed and Confused.
- Substitute check marked "not sufficient funds"
- Wood, Leslie (2005-06-29). "DA explains consequences of writing bad checks in Gallup". Independent. Archived from the original on 22 April 2008. Retrieved 2008-05-09.
- "Bounced cheques yield libel damages". The Independent. 21 July 1992. Retrieved 2009-09-24.
- Ackland, Richard (6 August 2010). "Cheques and free speech get bounced - Aktas v. Westpac". Sydney Morning Herald. Retrieved 13 June 2014.
- "THE NEGOTIABLE INSTRUMENTS ACT, 1881 ACT NO. 26 OF 1881". 1881.
- "The legal consequences with bounced cheques! - Yahho India Finance".
- Clancy, Rebecca (2013-01-01). "UAE stops jailing expats for bounced cheques". The Telegraph. Retrieved 2013-05-22.
- "Don't let your mouth write checks your body can't cash", The Big Apple, February 10, 2010
- National Check Fraud Center. Explains the laws pertaining to bad checks in all fifty U.S. states.