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How a stop payment works

Dr. Don TaylorDear Dr. Don,
I recently started some contract work for a client who paid me one-half up front via check. I cashed the check at my local bank, where I have a checking account and received the funds. The check cleared. The client canceled the check three days after I cashed it (I found out via a phone conversation a day later). The client banks at a different bank. What will happen to the client's account and my account? Will the funds be debited from my checking account? What can I do if the canceling of the check after the fact results in NSF activity on my account? Please give me as much detail as possible. Thank you for your promptness.
-- Chris Cheque

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Dear Chris,
You raise some interesting issues that make it a good letter for this column. Let's start out by pointing out that the client is requesting his bank to stop payment on, not cancel, the check.

The client's attempt to stop payment -- three days after you've cashed it and the check has cleared -- can't work. A bank can't stop payment on a check that it has paid. If the funds were paid to you in error, then the client can request them back from you, but the banks are out of the equation.

Banks typically have a hold-harmless provision on their stop-payment forms stating that they can't guarantee the stop payment until after a reasonable time has passed to allow the bank time to circulate the stop-payment information through their branches. With computer networks, banks can move quite rapidly to implement a stop payment, but they can't turn back time. If you cashed it and the client's bank paid it, the money is in your account and out of the client's.

Your bank may have put a hold on the funds, depositing them to your account, but not allowing you use of those funds for a period of time. When a bank places a hold on deposited funds, it is required to let the depositor know of the hold. Federal Reserve Board Regulation CC describes bank requirements concerning holds on customer accounts in greater detail. The hold is there to protect your bank. If the check didn't clear because of a stop payment, and there was a hold on the deposit, then you never had access to the funds. Checks written against held deposits will bounce due to insufficient funds and you are responsible for any insufficient-funds fees.

So what's key here is the timetable of events. When did you deposit the funds? Was there a hold on the deposit? If so, then how long was the hold? When was the check presented to the client's bank for payment? Was the stop payment in effect before the check was presented for payment?

To me, you've got bigger issues than trying to understand bank procedures and check clearing. Why is the client trying to stop payment? Why are you more concerned about the check clearing than the work contract?

-- Posted: Dec. 16, 2004





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