An overdraft occurs whenever a bank is presented with a check against an account totaling an amount greater than cash in the account and the check is deposited but not collected from the payor banks. If the bank pays the checks presented against the account before the checks deposited are collected, the result is an overdraft. A bank is not required to honor checks that exceed the current collected balance in the depositor’s account.
How Do Banks Generally Handled Overdrafts?
State and federal laws create obligations between the drawer of the overdraft check and the payor bank, and also provide remedies for collection on the check itself, on the money itself, or on the obligation for which the check was drawn. In other words, the bank may enforce the debt created by the overdraft in the same manner as any loan or promissory note may be enforced.
A bank is normally not under any obligation to permit an overdraft in the absence of agreement otherwise, even where the bank had previously permitted overdrafts by the same depositor.
Does a Bank Have the Right to Take Money from Another Account to Pay an Overdraft?
Normally, a bank has the right to apply funds from a deposit account to cover an overdraft on another deposit account if both accounts belong to the same depositor.
Can a Bank Charge an Overdraft against a Partnership?
An overdraft must, in general, be charged against the account of the depositor who wrote the overdraft check. However, problems have arisen with respect to overdrafts affecting a partnership and an individual partner. It has been held that a bank cannot charge an overdraft of a partnership against the individual account of a member, although the member, as such, may be liable for the overdraft.
Service Charge on Overdraft Checks
According to most state and federal law, banks are permitted to charge service charges on overdraft checks as long as the charge is "reasonable". Reasonableness is determined by similar service charge rates in the banking industry at the time of the overdraft.
What Is Check-Kiting and What Do Banks Do About It?
Banks sometimes fall victim to the form of fraud known as check-kiting. A check kite is a method of fraud in which the wrongdoer creates a continuous interchange of worthless checks between at least two accounts at separate banks and involves covering overdrafts with deposits of checks creating overdrafts at other banks. A successful kite requires the existence of two conditions:
- A time period of several days in the collection process before the depositary bank can make presentment of the checks to the drawee bank
- The willingness of the depositary bank to pay checks drawn against uncollected funds
When a bank at which checks are presented for payment learns that its depositor, as drawer of the checks, is engaged in a kiting operation, the bank is entitled to return the checks, provided that it acts to give proper notice of dishonor and return the checks within the applicable time limits.
Should I Contact a Lawyer Regarding my Overdraft Problem?
If you have an overdraft problem you should first look at the bank policies distributed to you when you opened your account. If the overdraft issue is not covered in the policy information distributed to you or is very serious, you may wish to contact a lawyer to figure out what course to take with you bank and whether you should sue them for your losses.