© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Checks The check is used more than any other instrument of credit as a means of making payment, both to settle debts and to pay for purchases. Checks need not be made out on the printed forms supplied by banks. Any writing that includes the essential elements of negotiability is considered a valid check when signed and delivered by the drawer. However, many banks today prefer that the encoded routing number assigned a drawer (depositor) be shown on every check written by him or her

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Relationship between Bank and Depositor A check provides a safe means of transferring money and serves as a receipt when paid and canceled by the bank. The bank must honor a check when it is properly drawn against the money the drawer has on deposit, or the bank will be liable to the drawer for damages

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Payment of Checks The UCC provides that, with respect to the liability of the drawer, a reasonable length of time for presentation for payment is 30 days after the date appearing on the check or after issue (the date the check is actually written), whichever is later. A bank may pay a check presented more than 30 days after its date, but it is not required to do so. Stale check: A check presented more than six months after its date; will not be honored by banks

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. The Check Clearing for the 21 st Century Act This act, commonly known as Check 21, is a federal law revolutionizing the manner in which checks are handled by banks. Check 21: Became effective in 2004 Created efficiency in check handling by allowing banks to create digital substitutes of checks, thereby removing paper checks from the process. Allows for rapid electronic check transfers

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Certified Checks A merchant who sells goods to a person whose credit standing is not known may request the customer to make payment by certified check. Certified check: A check that the bank has promised to pay when it is presented for payment

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Certified Checks (cont.) Liability If a drawer of a check has the bank certify it, he or she remains conditionally liable for payment of the check until the holder can reasonably present it for payment. However, when a check is certified at the request of the payee or holder, while the drawee is still responsible for eventual payment, the drawer and all prior indorsers are released from all liability. The reason is the payee or holder could have requested payment instead of certification

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Cashier’s Check Sometimes called an official check, a teller’s check, or a bank check. It is issued by the cashier or other designated officer of a bank and drawn against bank funds. A depositor may request such a check when he or she intends to use it to pay for merchandise from an out-of-town dealer who will not accept a personal check. A cashier’s check is made payable either to the depositor who purchases it from the bank or to the person who is to cash it.

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Traveler’s Check A certified check issued in a denomination of $10 or more by certain banks, travel agencies, and financial services companies. For persons who are traveling, especially in foreign countries, traveler’s checks are a safe form in which to carry money. Only the purchaser who signed the checks when he or she bought them may negotiate them

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Money Orders A money order is similar in form to a personal check, but it is generally purchased at a bank or other third party location. Money order funds are prepaid – much like a certified check. Thus, money orders are considered to be a more trusted form of payment than a personal check. Money orders are limited in face value

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Bad Checks and Forgery Bad Checks Bad check: One against a bank in which the drawer has insufficient funds on deposit to cover the check or no funds at all. It is a criminal offense for a person to intentionally issue a check drawn on a bank in which that person has an account but has insufficient funds on deposit. Forged and Raised Checks Forgery: The act of fraudulently making or altering a note, check, draft, or some other document, causing the financial loss of another. Both the intent to defraud and the creation of a liability must be proved in order for an act to constitute forgery. A person who commits a forgery is guilty of a crime

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Forgery Two common types of forgery: A forged check A raised check Liability for Forged Checks A depositor who opens a checking account with a bank must fill out a signature card and leave it on file with the bank. The bank is then assumed to know the depositor’s signature and is liable if it pays any checks on which the drawer’s signature has been forged

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Postdated Checks A check that is dated later than the date the check is written. A person may write a postdated check when insufficient funds are in the bank at the time the check is drawn, but the person expects to deposit the necessary funds by the date on the check. A person also may postdate a check for self-protection when some act is to be completed by the payee before the date of the check. Note that a bank may honor a postdated check before its date unless the drawer has given the bank reasonable notice of the postdating

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Stopping Payment on Checks An instruction a depositor gives to his or her bank not to pay a particular check. The notice can be given at any time before a check is presented for payment. If the bank does not do as requested by the drawer and cashes the check, it is liable to the depositor for the amount paid

© 2013 The McGraw-Hill Companies, Inc. All rights reserved. Example: Stopping Payment on Checks Facts: Isabel issued a check to Juan for $500 as payment in full for a previously owed debt. Later, Isabel realized that she had already paid Juan in cash. She tried to contact Juan several times to correct the misunderstanding. Unable to reach him, she asked her bank to stop payment on the check. While the bank honored her request, it charged Isabel a service fee. In this case, Isabel must pay the service fee as banks usually charge such fees to provide the service of carrying out a stop-payment order