Avoid the bounce! Don't get foreclosed by the new check law

By Broderick Perkins

A bounced check is that credit faux pas that nearly everyone has committed. However, your checks are now likely to bounce much sooner than before. That is, of course, if you write them with insufficient funds in your checking account.If that check is a mortgage payment, not only will you risk an insufficient funds fee for the bounce, but your credit standing can also be at risk. Not to mention that the lender could have the right to put your mortgage loan in default.A check "bounces" when you don't have enough money in your checking account to cover the amount written on the check. That can happen because you over estimated the "float" time the period between when you write the check and when your bank actually cashes it.Float times vary widely depending upon how a consumer handles the check, how he or she sends it to the payee and how the lender processes it. The time includes how long you hold it after you write it, mailing time and processing time at one or more banks.Float is not legally sanctioned, nor does law prohibit it, but the widely used and somewhat risky grace period is perilous, now more than ever.A new product of the technology age, Check Clearing for the 21st Century Act (also known as Check 21) is a money-saving proposition for banks because it allows them to process checks faster and do away with reams of paper work.Effective Oct. 28, 2004, Check 21 allows banks to electronically process checks that will allow not only the paying bank (your bank), but other banks including those earlier along the processing route to "truncate" or stop your checks as paid. It also allows only an electronic image, a legal substitute of your check, to continue on down the line.Today most check truncation takes place at the paying bank. When you opened your checking account, you told the bank when to truncate your checks by signing off for a statement that included getting the original checks returned, receiving check images only or receiving merely a line statement showing each check paid.Under the new law, the bank won't need your permission regarding where to truncate your checks and you won't get your original check back. The bank that stops it will be free to destroy it.All banks are not yet equipped to handle the new law, which only gives them permission to change the check handling procedure without mandating it. Once banks do change (and they will), the new procedure should speed up the check clearing process and shorten the float time. Once it arrives at the first bank, the new process would take a maximum of two to three days.If you are accustomed to longer float periods, you'll have to change your habits or expect to pay some hefty insufficient funds fees for bounced checks.If a check for your mortgage payment bounces, by the time you learn of the bounce and have it covered, a full month might have elapsed and that could put a negative ding on your credit report. Some loan terms also come with payment grace periods of, say, 15 days after which you must include a late payment penalty with your payment.While lenders don't typically begin foreclosing proceedings until months after missed payments, your lender may find you in default after a single month, especially if it gets to be a habit.The publishers of Consumer Reports, Consumers Union and other consumer advocates offer these suggestions to help you cope with the new law:Obviously, as has always been the case, don't write a check until your account has sufficient funds to cover it.Get overdraft protectionOpen a new account (say, an equity line) or tie your checking account to an existing account that can be automatically tapped if a check generates red ink on your checking account balance. Depending upon the lender and the type of accounts you have, the overdraft protection could also come with a fee levied each time the protection is triggered.Use direct depositYour employer or other source of income may offer to directly deposit your payroll or other income check into your checking account, which is likely sooner than you'd manage to get to the bank or automatic teller machine to make the deposit yourself.Use technologyConsider originating your payments electronically and use online banking services to check your account regularly. Both can save time and money. First, you typically can't complete electronic payments if you don't have the cash in the designated account tapped to make the payment. Choose to have the payment made conveniently and automatically on the same day every month, or maintain more control over the process by making the payment manually (via the web) each month. It's an excellent option provided the bank or electronic payment service you use offers such options.Handling accounts electronically also allows you to overcome the monthly wait for printed statements by giving you the option of monitoring them more frequently. That will make you aware of any problems that can be fixed much more quickly.Get substitute checksMany banks may stop providing original canceled checks with your monthly statement. If so, ask for the new "official" copies called substitute checks, which are the legal equivalent of original canceled checks. Your lender may charge you, but under Check 21, the new canceled checks give you the right to have your bank credit funds up to $2,500 deposited into your account within 10 days if it incorrectly paid out amounts.Don't volunteer for check truncationDecline invitations from your bank for voluntary check truncation. Your rights are limited under the voluntary non-return of your checks and it will take you longer to retrieve a copy of your check if you don't regularly receive the new substitute version.Use your credit card to get back some floatIf your credit card has a sufficient grace period before interest is levied following a purchase, consider using it, especially for larger purchases. Then just pay it off within the grace period with a check fully backed by funds in your checking account.Copyright Content That WorksBroderick Perkins has been a consumer and real estate journalist for 25 years. He is a contributing columnist for www.RealtyTimes.com.