A check serves as a written order instructing a bank to transfer funds from the account of the payor to that of the payee. Upon depositing the check, the payee's bank requests the funds from the payor's bank, which deducts the amount from the payor's account and transfers it to the payee's account.
The payee's bank deposits the full amount once it receives the funds from the payor's bank. However, if the payee fails to cash or deposit the check, it becomes an outstanding check.
What is an Outstanding Check?
An outstanding check is a check that has been written by a payer but has not yet been deposited or cashed by the payee. In other words, the payee has not yet received the funds from the check.
When a check is written, the payer's bank account is debited for the amount of the check. The funds are then held by the payee's bank until the check is presented for payment. Once the payee deposits or cashes the check, the payee's bank sends the check to the payer's bank for payment. At this point, the payer's bank account is credited for the amount of the check, and the payee's bank account is debited.
However, until the check is presented for payment, it is considered an outstanding check. This means that the payer's bank account balance does not reflect the fact that the funds have been committed to the payment of the outstanding check. As a result, the payer could inadvertently overdraw their account if they spend more money than they have available, not taking into account the amount of the outstanding check.
It's important for both payers and payees to keep track of outstanding checks to avoid overdraft fees and ensure that they have accurate records of their financial transactions. Payers should deduct the amount of outstanding checks from their account balance when calculating how much money they have available to spend. Payees should also keep track of outstanding checks to ensure that they receive payment for the checks they have received.
In some cases, an outstanding check may become stale-dated, meaning it has not been deposited or cashed for an extended period of time, typically six months to a year. At this point, the bank may refuse to honor the check, and the payer may need to issue a new check to the payee.
How to Prevent Outstanding Checks and Bank Overdrafts
Outstanding checks can cause unexpected bank overdrafts, which can lead to costly fees and financial stress. Fortunately, there are several ways to avoid this common problem.
One effective method is to keep a balanced checkbook. This involves regularly tracking all checks that have been written and comparing them to the account's available balance. By doing so, you can identify any outstanding checks that may have been forgotten or not yet deposited. This can help prevent the risk of overdrafts if the payee decides to cash the check at a later time.
Another option is to contact the payee and remind them about the outstanding check. A friendly reminder may prompt them to deposit or cash the check promptly. Additionally, if they have not received the payment, this may prompt them to inform you so that you can reissue the check.
As more banking activities become electronic, you can also use the online bill payment service offered by most banks to avoid writing checks and forgetting about them. This service allows you to view real-time information on outstanding checks and the total balance in your account, helping you manage your finances more effectively and avoid overdrafts.
What to Do When a Check You Wrote is Not Cashed
If you have ever written a check to someone and it never got cashed or deposited, you may wonder what to do next. An outstanding check can become a problem if you forget about it and spend more money than you have in your account. This can result in an overdraft fee, which can be costly.
When you write a check, you are authorizing your bank to transfer funds from your account to the recipient's account. The recipient can then deposit or cash the check at their bank. If the recipient doesn't cash or deposit the check, the check becomes outstanding. The funds are still in your account, but you don't have access to them because they are earmarked for the recipient.
To avoid an overdraft fee or any other issues, it's important to keep track of outstanding checks. One way to do this is to maintain a balanced checkbook. This will help you keep track of the checks you've written and whether they've been cashed or deposited.
If you have an outstanding check that you're unsure of, you can contact the recipient and ask if they've received or cashed the check. If they haven't, you can ask them to return the check so you can cancel it and reissue a new one. Alternatively, you can ask them to deposit or cash the check as soon as possible.
Another option is to use your bank's online bill pay service. This service can help you keep track of outstanding checks and provide real-time information about your account balance.
Check kiting is a form of financial fraud that exploits the banking system's handling of checks, specifically the "float time" between a check's deposit in one bank and its clearance in another.