When you deposit a check into your bank account, your bank adds the face amount of the check to your available balance. A chargeback occurs if your bank deducts the check proceeds from your account balance as a result of the check writer's bank refusing to process the check. Chargebacks can prove expensive for both check writers and check recipients.
If you write a check for an amount that exceeds your account balance, your bank can refuse to pay that check when the check recipient or the recipient's bank presents it for payment. Banks also refuse to honor checks in the event of fraud, and this often occurs when an account holder reports a checkbook as having been lost or stolen. It can take a few days for a bank to return a check to the check recipient's bank, so the person who deposited your check may not see funds being deducted from his account until several days after the deposit occurred.
In 2004, the Check Clearing for the 21st Century Act took effect, enabling businesses to convert paper checks into electronic payments. When you process an electronic payment, the check writer's bank places a hold on the amount of the transaction and you receive immediate notification if the account contains insufficient funds. However, chargebacks can still occur with electronic checks because check writers have 60 days within which to dispute charges. A check writer can contest a charge for various reasons, including fraud or a dispute with a merchant over the delivery of goods or services. Therefore, the so-called Check 21 Act did not serve to eliminate check chargebacks.
Banks typically assess a chargeback check fee that the account holder who deposited the item must pay. Once the funds and the fee have been debited from your account, you may lack sufficient funds to cover your outstanding checks and electronic charges. You have to pay an overdraft fee for any charges that cause your account to go into the negative. If your bank refuses to honor these charges, you can still incur a non-sufficient funds fee for each charge.
Many states have bad check restitution programs through which you can pursue the check writer for the amount of the charged back check as well as funds to cover the fees and charges that you incurred as a result of the check bouncing. You can also take a bad check writer to court. However, you generally cannot sue someone who wrote you a bad check from an out-of-state bank. Therefore, many business owners only accept checks drawn against local banks. State laws related to bad checks vary, and in some states you may find yourself unable to sue check writers who write post-dated checks, two-party checks and certain other kinds of bad checks.