As a small business owner, you may use business software to expedite the payment process. But every now and then, you may need to write a check to a vendor or receive one as a form of payment.
One of the most significant problems with checks is that it’s easy to lose them, giving rise to what’s known as stale-dated checks. A stale check can create an accounting hassle.
Today, we’re here to provide you with all the information you need about stale-dated checks. Whether you’re waiting on a vendor to cash a check or recently came into an old check, you’ll find out how to handle it in this article.
What is a stale-dated check?
A stale check is one presented to a bank after a specified time, typically six months. While a stale-dated check is not necessarily invalid, banks may deem it an “irregular” bill of exchange and refuse to honor it. At this point, the only way to process the payment is if the drawer — otherwise known as the check writer or issuer — changes the date on a replacement check or issues a new check.
The United States Uniform Commercial Code (UCC) specifies that banks are not obligated to cash a check more than six months old. The UCC states, “A bank is under no obligation to a customer having a checking account to pay a check, other than a certified check, which is presented more than six months after its date, but it may charge its customer’s account for a payment made thereafter in good faith.”
Under this definition, banks include those financial institutions that offer:
- Checking accounts
- Savings accounts
- Credit unions
Also notable in this definition is a certified check. Certified checks are personal checks from a bank account owner who has drawn on the account and had the bank guarantee the check.
When a check is certified, the bank backs that the drawer’s signature is genuine and that he or she has enough money in the account to cover the cost of the check.
Certified checks guarantee that there are funds in the account, so those cashing the check don’t have to worry about it bouncing.
Certified checks are similar to cashier’s checks. The only difference is that when issuing a cashier’s check, the bank withdraws the funds from the purchaser and then issues the check on the purchaser’s behalf. Because the paying bank receives funds upfront, the recipient doesn’t have to worry about dealing with a bad check.
So in summary, banks are not obligated to honor outstanding checks older than six months, although they can potentially do so. Banks are required to cash certified checks and cashier’s checks, even if they are greater than six months old.
Do these rules apply to business accounts?
As a small business owner, you should be writing checks from your company bank account instead of your personal bank account. But the UCC refers explicitly to personal checks. Do the same rules apply to business bank accounts?
Essentially, yes. If there are no further instructions on the check, then the bank can choose not to honor it if it’s older than six months. However, many businesses tend to put a length of time on the check for accounting purposes.
For example, business checks may contain statements such as, “Must void after 90 days” or “Not valid after 180 days.” If this is the case, then the bank will not cash your check if someone tries to deposit it outside the specified window.
Banks will not do so because of the accounting ramifications it can have.
Businesses have so many checks flowing through them that depositing a check after this date may cause it to bounce. It could also cause problems with things like the balance sheet and cash flow statement.
So let’s say that as a business owner, you wrote a check to a vendor. Your checks provide instructions to the bank not to cash the check after 180 days. Eight months later, you realize that the vendor has still not cashed the check.
It may be tempting to merely reverse the expense and add the cash back into your general fund. Unfortunately, however, it’s not this simple.
Unclaimed property laws complicate the process. Even if the payee never cashes the stale check, this doesn’t mean that your business receives extra cash. Instead, the money likely belongs to the state.
Unclaimed property and escheatment laws
Every state in the United States has what are called escheatment laws that require a business to hand over unclaimed property after a specific period.
Uncashed checks to vendors, contractors, employee payroll, and distributions to stockholders are all potential unclaimed property.
Each state has different rules regarding when you need to report unclaimed property. The length of time it takes uncashed checks to become unclaimed property is referred to as the “dormancy period.”
The length of time for the dormancy period can vary considerably from state to state. The Securities and Exchange Commission (SEC) says that the period is “often five years.” However, you should look at the escheatment laws for the state in which you’re conducting business.
Almost every state requires a business to perform due diligence by contacting the owner of the unclaimed property.
The exact due diligence requirements vary by state, but the National Association of Unclaimed Property recommends a formal letter to the check recipient sent by first-class mail.
Letters should alert the owner of your obligation to turn over the property to the state. Let the owner know how he or she can claim his check and provide a deadline for doing so. Allow a reasonable amount of time to respond. For example, if you’ll need to report the property on June 1, mail the letter before the beginning of the year.
You should also keep diligent records of the attempts you made to contact the business owner.
If this process does not work, the state will, according to the SEC, “hold the account as a bookkeeping entry, against which the former account owner may make a claim. States tend to sell the securities in escheated accounts and treat the proceeds as state funds.”
What to do if you notice a stale check on your books
If your bookkeeper or accountant sees that you have a check that’s approaching expiration, you should be diligent in contacting the other business and encouraging them to cash the check.
If the company does not cash the check, you’re going to have to go through the escheatment process, and you’ll end up losing the cash either way.
If the owner says that the check is lost, or you notice that it has become a stale check, you’re going to need to issue a new check. In addition to creating a new check, you should also issue a stop payment on the old check.
A stop payment informs your bank that you do not want the check cashed. Essentially, it voids the check. A stop order prevents the other business owner from cashing both the original and new checks.
Stop payments also demonstrate why bookkeeping is so critical to a business’s success. Your checkbook should indicate relevant information, such as:
- The date on the check
- Who received the check
- What it was for
- The check number
- The amount
- Other notes and information
Without this information, it becomes much more challenging for your bank to process a stop payment. Keeping thorough records will go a long way toward ensuring business compliance.
What if you find a stale check?
Let’s say the opposite happens, and you are on the receiving end of a check that has expired. The first thing you should do is contact the issuer. The company may be willing to reissue the check, even if it’s stale. This is especially the case with government checks.
If you don’t have any luck contacting the check issuer, consider working with your bank. Some banks may deposit checks if they have reason to believe that the issuer is legitimate, and the company has enough funds in its account to cover the check.
It may take some convincing, but it’s possible to have the bank settle the check for you, even after expiration.
If these options don’t work, you can check with the state in which the issuing company is located. Remember that escheatment laws require companies to turn over unclaimed funds. As the rightful owner of these funds, the state should hold them in case you come to claim them.
Putting a company policy in place for stale-dated checks
As a business owner, you should take time to clearly outline how your company is going to handle stale checks. If you’re receiving a check, your company policy should be to deposit it within one month to ensure you do not lose it.
The policy should more clearly outline what you are going to do if a recipient does not cash a check that you’ve issued.
The first step to implementing a practical company policy for stale-dated checks is to understand state laws. Read up on requirements both for your home state and for any other states your company does business in.
Consider the type of unclaimed property you could potentially have and investigate the state dormancy period for each.
Use this information to create a policy on owner contact and state remittance for different categories of uncashed checks. NAUPA’s free reporting software can help you craft a sensible plan.
It’s also critical that all employees, especially accounting personnel, know that unclaimed property doesn’t belong to the company. Since you owe that money to either the state or the property owner, uncashed checks should never be voided. Instead, they should be monitored, and the owner should be contacted periodically.
Don’t put in a stop payment with your bank until issuing a new check.
Make sure your bank accounts are reconciled on a monthly basis and contact owners when need be. Being proactive can help you avoid having to deal with stale-dated checks.