Float and Check 21

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It’s more important than ever to be vigilant about your checking account record keeping. The good old days of writing a check and being able to count on several days of “float” before the money is deducted from your account are gone. The Clearing for the 21st Century Act, or Check 21, took effect in October 2004 and as has changed the checking account landscape. It’s designed to modernize the way checks are processed.

Say you write a check to Sky High Utilities to pay your bill. Sky High can turn the paper check into an electronic image and speed it through the system. Sky High no longer has to mail the check to its bank, which in turn may mail it to a regional bank, which then mails it to your bank for payment.

In addition to saving the banking industry billions of dollars in transportation and processing costs, it avoids situations where transportation grinds to a halt due to weather or more dreadful reasons such as Sept. 11.

Potential problem for consumers

While Check 21 doesn’t yet mandate the electronic conversion of paper checks, the potential problem for you as a checking account customer is that you don’t know which checks you write are converted until you see your monthly account statement. That means it’s unwise to count on “float” — the amount of time that lapses from when Sky High Utility sends your check to its bank to when your bank receives the check and debits your account.

If you keep enough money in your account to cover the checks you write, you probably don’t care very much about float. But many people live a bit close to the edge with their checking accounts, and they could see checks bounce.

Substitute checks

Under the old system, most banks gave customers the option of receiving their canceled checks. Banks no longer have to do that, and customers can’t demand that a canceled check be returned to them. If you have a dispute regarding a payment and you need a copy of the original check, you’ll have to ask your bank for a substitute check. A substitute check is a new negotiable instrument created by the Check 21 law.

Substitute check

A substitute check is a paper reproduction of your original check that contains images of the front and back of your original check. It must carry the legend: “This is a copy of your original check. You can use it the same way you would use the original check.” If you receive a copy of your original check and it doesn’t have that legend, it’s not a substitute check and is not a negotiable instrument. The true substitute check can be used as proof of payment, even in court.

Recrediting your account

Check 21 protects you if there’s a problem that can be traced to the creation of a substitute check. What if there’s an incorrect charge on your statement because the amount of your original check isn’t readable on the substitute? Or what if your account is double-debited, meaning the original check is deducted and the same amount is deducted again because of the creation of a substitute check? In either case, you’d have the right to what’s called an “expedited recredit.”

Check 21 says the bank must either:
  • Produce the original check or a copy that accurately represents the check and demonstrate that the charge is valid.
  • Recredit funds on the business day following the business day the bank finds the claim valid. If the bank can’t determine the validity by the 10th business day it must recredit the first $2,500 on the 10th day and the remainder by the 45th day.

Exceptions are made for “new accounts, repeated overdrafts and reasonable cause to believe that fraud is involved,” according to the law.

Check-hold times

A criticism of Check 21 is that it didn’t shorten the amount of time a bank can hold checks you deposit before crediting your account. While consumers can expect check-hold times to shorten, it’s not about to happen immediately. It’s an issue that riles some consumers, who say their checks are bouncing and they’re getting socked with fees for nonsufficient funds.

If Check 21 makes you nervous that you might bounce checks, there are ways to save yourself from being charged those nasty nonsufficient funds fees, not to mention the embarrassment of bouncing a check. First, try to develop some good habits; the Bankrate article “7 ways to keep your bank account in check” can help. In the next section, we’ll look at some protection plans that might be right for you.