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Federal Law on Reversing Checks?

I accept large amount checks from clients. Earlier this year I had a client place a stop payment on a check that had already cleared (three days earlier). After a little bit of research, I learned that checks could be "reversed" with a request from the check source anywhere from three months to up to two years after they had been cleared.

I was told banks did this to allow someone to challenge an "alerted" check, but it also means someone could just issue a check and then reverse it two weeks later. What is the federal law on this issue? What is the time frame? What constitutes a challenge, and does the bank have the ability to withdraw funds immediately upon being challenged?

Not sure where you could have found the information about "reversing" paid checks, but if the checks in question cleared in the form of checks, once they were paid, they were not subject to reversal. If, however, you are a business that converts client/customer checks into electronic (ACH) items and submits them electronically, there are certain claims that the check issuers can make in order to reverse the ACH transactions up to sixty days after posting. For example, the check issuer could claim that there was no authorization to convert the check to ACH format, or the check issuer could place a stop payment on the original check before the ACH entry is received by the paying bank, then the ACH item (replacing the check) is received and paid. In such cases, the receiving bank can correct its oversight in allowing the payment, up to sixty days after the fact.

Whether your bank can withdraw funds from your account immediately upon return of an ACH entry is dependent on your deposit contract with the bank. In most cases, the answer is yes.

Published on 9/05/07