Understanding Bounced Cheques: Definition, Consequences, and Fees (2024)

What is a Bounced Cheque?

In simpler terms, a dishonoured cheque also called as bounced cheque is the one that gets rejected by the bank due various financial and non-financial reasons such as lack of funds in the account, incorrect date, signature mismatch etc. In simpler terms, a dishonoured cheque also called as bounced cheque is the one that gets rejected by the bank due various financial and non-financial reasons such as lack of funds in the account, incorrect date, signature mismatch etc. This usually happens for a variety of reasons. When a cheque bounces, the bank may charge fees to the person who wrote the cheque (the issuer). Bouncing cheques repeatedly can hurt your credit score and make it harder to do business in the future. There can even be legal trouble / implications, if the cheque was dishonoured or returned unpaid for want of funds / insufficient funds.

Why Do Cheques Bounce?

Cheques can bounce for various reasons, all of which typically relate to the cheque being deemed invalid or unacceptable by the bank. Here are some common reasons why cheques bounce:

Insufficient Funds: The most common reason is that the account from which the cheque is drawn does not have enough money to cover the cheque amount.

Incorrect Date: A post-dated cheque (one written with a future date) may bounce if presented before the specified date. Similarly, a cheque with an outdated date (stale cheque) can be rejected if it's presented too long after it was written/issued, typically more than three months.

Mismatch in Signature: If the signature on the cheque does not match the specimen signature held by the bank, the cheque will bounce.

Closed Account: If the cheque is drawn on an account that has been closed, it will bounce.

Irregularities in the Cheque: This includes issues like a mismatch in the amounts written in words and figures, incomplete details, or discrepancies in the cheque such as torn cheque, mutilated cheque etc.

Technical Reasons: Sometimes, cheques can bounce due to technical reasons such as errors in encoding or printing, or because the cheque is damaged or defaced.

Each of these reasons signifies an issue with the cheque or the account it's drawn upon, leading to the bank's refusal to process the payment.

What Happens When a Cheque Bounces?

When a cheque bounces, it means the bank has refused to honour it due any financial and/or non-financial reason such as insufficient funds in the issuer's account, a stop payment order, or other issues like mismatched signatures.

The payee is notified, often incurring a fee for the returned cheque. The issuer may face penalties, bank fees, and damage to their credit score. Repeated instances can lead to legal action and account restrictions. To resolve it, the issuer must cover the shortfall and any associated charges before reissuing the payment.

Fees and Penalties for Bounced Cheques

When a cheque fails to process or is bounced, the consequences are not limited to just mild inconvenience to the issuer and the receiver. Both the parties may have to pay a cheque bounce penalty. Additionally, repeated bounced cheques can lead to higher fees, account closures, and difficulty opening new accounts. It may also highly impact your credit score, thus making it difficult for you to obtain loans and other forms of credit.

How to Avoid Bounced Cheques?

To avoid bounced cheques, ensure you have sufficient funds in your account before issuing a cheque. Regularly monitor your account balance and keep track of all transactions. Use overdraft protection services offered by your bank to cover shortfalls. Set up alerts for low balances or pending payments. Opt for electronic payments when possible, as they provide instant confirmation of fund availability. Communicate with the payee if there might be any delays in funds to avoid potential issues. Finally, maintain good banking practices and manage your finances prudently to prevent overdrafts.

Conclusion

A bounced cheque can lead to a cascade of financial and legal troubles. Understanding the definition, consequences, and fees associated with a bounced cheque can help you manage your finances better and avoid potential pitfalls. By staying informed and proactive, you can ensure that your cheques are always honoured and maintain a healthy financial standing.