Check 21

In October 2003 Congress passed the Check Clearing Act for the 21st Century. That law became effective on October 28, 2004. You’d better understand how the new law works so that you don’t inadvertently rack up bank charges and adversely affect your business credit rating.

Check clearance

Check 21 is a new law that clears checks electronically (i.e., virtually instantaneously). There’s no more float for the checks with which you make payments, so watch yourself or you’ll bounce them. The average charge for a “dishonored check” (otherwise known as a bounced check) was about $23 nationally in 2003 but could be higher in your bank.

You can no longer stop payment on a check you’ve written (because it clears so quickly).

Make sure your account has overdraft protection to cover your payments in light of the quick clearance time. Not all financial institutions offer this banking option, so you may want to change banks to obtain it.

On the other hand, don’t assume your deposits will clear more quickly; they won’t.

Be sure to review your monthly statement more closely than ever. As always, balance your deposits, payments and other fees. Make sure you have not been charged twice for the same check or had the wrong amount debited from your account. If so, ask that the funds be “re-credited” (a new term under Check 21) to your account. Make your request in writing.

Substitute checks

You will no longer receive your canceled checks with your monthly statement. After processing, the paper checks are destroyed.

Instead you may receive a substitute check, which is not merely a copy of the original but considered to be the legal equivalent of a canceled original. This means you can use the substitute check as proof of payment (e.g., for expenses you deduct on your tax return).

Ask your bank to send you substitute checks so you can maintain records of your expenses. A bank does not have to do this automatically. Don’t agree to “voluntary check truncation,” which gives up your right to receive substitute checks.

Caution: An image page, which contains pictures of multiple checks on a single page, are not substitute checks and may not be accepted as proof of payment.

Learning about the new law

Ask your bank about its policies. Only about 5% of financial institutions are using the new rules now; others will implement them over the next several years.

For details about “Check 21” go to www.federalreserve.gov/paymentsystems/truncation/default.htm.

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