A dishonored check penalty, also called a bounced check fee or an insufficient funds (NSF) fee, is a bank charge imposed when a check cannot be processed because the account it was drawn on lacks sufficient funds. When you write a check, the payee deposits it, and their bank requests payment from your bank. If there is not enough money in your account, your bank “dishonors” the check by refusing to pay it, returning it unpaid to the recipient.
This situation triggers several consequences:
- Bank fees: Most banks charge between $20 and $35 per bounced check as a dishonored check penalty. This fee compensates them for the administrative costs of handling the rejected payment.
- Recipient fees: The entity expecting payment (like a utility company, landlord, or vendor) might assess their own fee for the inconvenience and processing cost of a failed check.
- Outstanding payment: You remain liable to pay the original amount of the check plus any fees charged by your bank and the payee.
- Financial reputation impact: Although a single dishonored check usually does not affect your credit score directly, frequent bounced checks can cause your bank to close your account. Account closures can be reported to consumer reporting agencies like ChexSystems, which can hinder your ability to open future bank accounts or obtain credit.
Reasons for Check Dishonor
Besides insufficient funds, checks may be dishonored for:
- Stop payment orders: You’ve instructed your bank not to honor the check.
- Post-dated checks: The check date is in the future, but the recipient tries to cash it prematurely.
- Stale-dated checks: Checks typically over six months old may be refused by banks.
- Signature mismatches: The signature on the check does not match the bank’s records.
- Closed accounts: The account from which the check is drawn is closed.
Dishonored Checks and IRS Penalties
If a check sent to the IRS for tax payments bounces, the IRS treats your payment as unpaid and assesses penalties. According to IRS guidelines, for returned checks $1,250 or more, the penalty is 2% of the check amount. For checks under $1,250, the penalty is generally $25 or the check amount, whichever is less. The IRS will notify you of the returned payment and additional penalties, which accumulate on top of your original tax liability and your bank’s fees.
Who Faces Dishonored Check Penalties?
- Individuals: Personal checks for rent, utilities, or services can bounce and incur penalties.
- Small businesses: Checks for payroll, suppliers, or bills can bounce, resulting in fees and damaged vendor relationships.
- Payees: While they don’t pay dishonored check penalties, they suffer inconvenience and may face bank fees for depositing bad checks.
How to Avoid Dishonored Check Penalties
- Track your balance regularly: Use your bank’s online portal, apps, or a check register to keep accurate account records.
- Set up overdraft protection: Linking your checking to a savings account or line of credit can help cover shortfalls, usually at a fee lower than bounced check penalties. Learn more about Overdraft Protection.
- Use electronic payments: Direct debit or online bill pay offers more immediate processing and balance updates. Understand how Direct Debit Authorization can facilitate reliable transactions.
- Monitor your account: Frequent monitoring helps alert you before checks are presented that could bounce.
- Communicate proactively: If you foresee a problem, notify the payee to arrange alternative payment methods.
- Maintain an emergency fund: A cash cushion helps cover unexpected expenses without overdrawing.
Common Misconceptions
- Banks automatically cover overdrafts: Overdraft protection is optional and may involve fees; not all transactions are covered automatically.
- Bounced check fees are insignificant: Fees accumulate quickly, especially if multiple checks bounce.
- Dishonored checks don’t impact your finances: Repeated issues may close accounts and damage your banking reputation.
- Writing another check fixes the issue: Writing another check without funds only adds more fees.
Frequently Asked Questions
What is the difference between a dishonored check and an overdraft?
A dishonored check is a specific type of overdraft that occurs when a check bounces due to insufficient funds. Overdrafts can also happen with debit card purchases or ATM withdrawals.
How long does it take for a check to bounce?
Most checks clear within a few business days, though large or out-of-state checks may take longer.
Can I go to jail for writing a bad check?
Generally, accidental bounced checks result in fees. However, knowingly writing bad checks can be criminal fraud with serious legal consequences.
Will a dishonored check hurt my credit score?
Not directly. But if your bank closes your account for repeated bounced checks, that closure can be reported to agencies like ChexSystems, affecting future banking opportunities.
For authoritative guidance, visit the IRS page on Penalties and Interest and the Consumer Financial Protection Bureau’s overview of Overdraft Fees.