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Sometimes referred to as non-sufficient funds, insufficient funds is a term used to refer to a checking account that does not contain enough resources to process a check that is presented for payment. When a state of insufficient funds is present, there are several different actions that may take place, including the return of the check to the depositor’s bank or honoring the instrument and charging the client an insufficient funds charge.
When a check is presented for payment against a checking account, the bank confirms the current balance within the account to determine if there are enough funds on hand to honor the face value of the check. If the account does contain enough funds, the check is honored and the entity that presented the check for payment receives the designated amount of funds. When there are not enough funds to cover the check, the bank must make a determination of what should take place next.
In many instances, a bank may choose to honor an insufficient funds check if doing so will only cause a small negative balance in the checking account. However, if honoring the check would overdraw the account significantly, the bank is much more likely to not honor the check and return it to the presenter. In both cases, most banks impose insufficient funds fees whenever there are not resources in the account to cover the face value of a presented check.
During the latter part of the 20th century, more banks began to offer a service referred to as overdraft protection. Essentially, this service would ensure that the bank would not return any check presented for payment, regardless of the current balance in the checking account. Many banks imposed certain limits on this coverage, such as only covering checks when the overdraft remained under a certain limit. However, the account holder would still be charged an insufficient funds fee in return for the service.
When a check is returned to the depositor, it is often accompanied by an insufficient funds letter. The letter will often include any instructions that may be relevant to any remaining courses of action, such as presenting the check for payment a second time. Most banks will not allow a bounced check to be deposited after the second attempt.
Once the originator of the insufficient funds check is notified of the problem with the check, he or she is normally provided some time to cover the face value of the check, plus an fees or penalties that the depositor chooses to apply. Should the originator not reimburse the depositor, the check may be reported to local law officials.
At that point, the option of dealing with the bad check by working with the depositor is no longer an option. Instead, the originator of the check will interact with local law officials to settle the matter. If the face value of the check and the assessed court fees are not paid, the originator may be arrested and placed in jail.
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