Some businesses may feel tempted to procrastinate depositing or cashing the check. It’s widespread for companies to delay this process if the amount is relatively low.
But business owners should understand: these checks have an expiration date. In other words, a formerly certified check turns stale. Keep reading the article to learn more about the topic. You will learn why checks turn stale and what to do if it happens.
Understanding Stale Dated Checks
A stale check is the one offered to a bank after a specific period. Usually, it’s six months. It doesn’t mean the stale check is invalid, but most banks have the right to claim it as an irregular bill of exchange and refuse to cash it out.
If this happens, there are two potential ways to solve the problem:
- ask the check writer (or issuer) to change the date on the replaced check;
- ask the issuer to issue a new check.
The UCC (United States Uniform Commercial Code) doesn’t force banks to cash a check older than six months. The agency states banks are allowed to refuse to cash uncertified checks of their customers. A certified check is the one younger than six months from the date of its issuing.
If a financial institution which issued the check allows the business to cash out the check, then it usually depends on the following factors:
- Whether the bank account is still open and in a good state.
- The owner of the account or the payer approved this action.
- There are funds to cash out the check.
- The name on the check and account match.
- The name of the payee matches the person’s ID (the one requesting to cash out the check).
If the bank allows someone to deposit such a check on their bank account, then it typically depends on the following factors:
- The bank which issued the check is still operating.
- Enough money on the depositor’s account to cover the check.
- The payor’s account is still open.
- The bank verifies there are funds within the account, and they are available.
- There is no stop-payment order in effect.
If the stale check is returned, then the bank may charge a fee for returning the check.
Unclaimed Property & Escheatment
The United States has escheatment laws in every state. According to these laws, businesses are legally obliged to give away unclaimed property after a certain period. Uncashed checks to contractors, vendors, employee payroll, and distributions to stockholders may be considered potential unclaimed property.
Each state enforces different rules concerning when companies must report their unclaimed property. The dormancy period is the period it takes uncashed checks to be considered unclaimed property.
The length of time for the dormancy period can be significantly different in each state. The government oversight agency called the Securities and Exchange Commission (SEC) that regulates these matters claims this period is “often five years.” But it’s critical to check the state’s laws to ensure this period isn’t less than five years.
It means businesses should take care of their stale-dated checks before they become unclaimed property. Note: the National Association of Unclaimed Property recommends sending a formal letter to the business owner in case their property may become unclaimed property.
The warning should be sent beforehand, giving the business owner enough time to react. If the attempts to inform a business owner won’t work, the state will deal with the situation according to the SEC. The states will hold the account as a bookkeeping entry. But the former unclaimed property owner can make a claim.
How Stale-Dated Checks Impact a Business?
Every business owner should understand that if their vendors or partners don’t cash out checks, they still do not belong to the business. A stale check is either the property of the owner of the check or of the state. This means the business doesn’t get extra cash.
As mentioned in the article, according to the escheatment law that works in every US state, a business owner has to deal with stale checks by informing their previous owners.
Typically, accountants or bookkeepers notice that there is a potential stale-dated check and inform business owners. You can contact the owner of the check to inform them about the check that is about to expire. If they lost it, you might issue a new check to avoid having to deal with the stale-dated check in the future.
Actions to Take in Case a Stale Check Occurs
There may be two situations related to stale-date checks. In the first situation, a business owner notices the stale-dated check on their books. This means their vendor didn’t cash it out or send it directly to the deposit. In the second situation, the business owner may find an expired check. Let’s see what to do in both situations.
Stale Check on Books
If a company owner or any other responsible for books person notices a nearly expired check, their task is to contact the other business. It gives them a chance to cash it out.
If that business won’t use the check, then you will have to go through the escheatment process. Meaning your company still won’t own the money since it belongs to that other business or the state.
If the owner claims they lost the check, issue a new check. But note: it’s critical to set a stop payment order on the previous check so the bank won’t cash it out.
The stop payment is a tool that informs the bank that you don’t want the check to be cashed. Typically, the stop payment voids it. In simple words, the other business owner won’t cash out both checks.
The stop payment tool explains why it’s critical to properly keep your books. The checkbook should indicate the following data about the check:
- its date;
- its receiver;
- its purpose;
- its number;
- the amount;
- other data.
It’s nearly impossible to ask the bank to place a stop payment order. That’s why it’s important to have a policy within the company that regulates how to keep the check data in case of stale check occurrence.
A Business Owner has a Stale Check
Business owners or accountants may find stale checks that they lost or forgot to cash out. The first thing to do is to contact the issuer. Most companies are OK with issuing new ones even if they are stale. It’s easier to deal with the situation if it’s a government check.
If it’s impossible to contact the issuer, call the bank. Some banks may deposit even stale checks but only if the issuer is legitimate. Another condition is the sufficiency of funds on the issuer’s account.
If it’s impossible to convince the bank, there is one last option – contacting the home state where the company is located. According to the already mentioned escheatment law, companies must turn over unclaimed funds. The state is holding these funds in case the previous owner wants to claim them.
That’s exactly why it’s so important to keep track of books and verify that you didn’t forget to cash out any check. If this happens, most businesses have from two to four years to claim funds.
Experts recommend cashing out funds within a month. Some specific checks may even have a shorter expiration date. Typically, it’s 180 days (six months). But some checks have 90 days (three months), and then some banks may refuse to send funds to your deposit.
Why Do Stale-Dated Checks Occur?
Stale dated checks usually occur in the following cases:
- Uncashed plan distributions when participants ask for distributions at their normal retirement age, but they never cash out the check.
- Mandatory distributions of less than $1,000.
- Unresponsive participants who request checks but don’t act on them in the future.
- Returned checks are typically returned by postal services because they are undeliverable.
In some cases, a check may have the wrong address, or it’s impossible to find an alternate payee or a beneficiary. In both these cases, the check will become expired.
A stale-dated check is the one that has passed its life as a valid payment form. The valid life lasts for six months from the issuing date. If a check goes stale, the bank won’t honor it and will refuse to send its value to your personal deposit.
That’s why it’s critical to deposit the check’s value immediately or within one month to avoid losing money or having to go through much more difficult procedures to claim the check’s value.
Author: Charles Lutwidge