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Home >> Checks/Money Orders >> Checks You Received
No Funds Behind Check: Legal?
We received repayment of a loan. We deposited the repayment check eleven days ago, and we were notified that seven days after our bank received the funds, the bank sending the funds may ask for the money back because the sender of funds lacks the funds in his account. How is this legal? Shouldn't the sender be responsible for their lack of funds? Shouldn't their bank have verified there was funds before they released them to us?
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 Contrary to what some people may have heard, there aren't links between banks that permit a bank accepting a check for deposit to know whether a check drawn on another bank is good. The banking system has existed for hundreds of years relying on "exception reports". You might call it a "no news is good news" framework. The law that governs the collection of checks -- Articles 3 and 4 of the Uniform Commercial Code -- was written with that process as its foundation.
The law requires that the check writer's bank promptly return a check if it won't honor it. If that bank fails to return the check by the end of the banking day after the check is presented for payment, the paying bank may become responsible for the amount of the check; otherwise, assuming that a dishonored check is promptly returned, the endorsers of the check, including you as the payee, are responsible for the amount of that check, even if you have been permitted by your bank to withdraw some or all of the funds represented by the check.
Should the sender be responsible for his lack of funds? Absolutely, but the responsibility is to you, the payee. If the check bounces, you will not have received the payment that you were due on the loan, so the sender would still owe it to you. If the check does bounce, you should require the borrower to send you a bank check or money order rather than a personal or business check. You should also ask for reimbursement of any bank fees that might be charged to you as a result of the bounced check.
Published on BankingQuestions.com 10/20/08
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