Check writing remains as an option to pay bills, gift birthday money, or even pay for items at the store.However, because checks are a paper financial instrument and don’t automatically get tracked like a digital payment, they require a bit more work to manage.
One part of check writing that can take some practice is the handling of an outstanding check.
What are outstanding checks? Are they good or bad? We answer your questions about this financial term and what to do when managing an outstanding check.
Outstanding Check Definition
An outstanding check is any check written on a bank account that hasn’t yet been cashed or deposited and cleared. It can be a personal or business check.
How a Check Becomes ‘Outstanding’
A check becomes outstanding simply by not being cashed or deposited. A check that was written moments, weeks, or even months ago is considered outstanding if it has not yet been cashed or deposited.
The Life Cycle of an Outstanding Check from Issuance to Clearance
Checks are simple financial tools that depend on both the payor and payee to take action to complete the payment. Here’s how outstanding checks work.
Issuing the Check
The payor, or person with the checking account, writes a check to the person they want to pay in the payment amount. The payor gives it to the payee and notes the amount of that check as a “pending” payment until the check fully clears and the account balance is adjusted by the bank to account for the payment.
Factors Leading to a Check Remaining Outstanding
The payee has the responsibility to negotiate the check, either by taking it to their bank and cashing it or depositing it in an ATM or other service location, or depositing it through a mobile banking app on their phone. If they do this in a timely manner, the check clears, and the payment gets transferred from the payor’s bank account to the payee’s bank account.
When the check is cashed or deposited, it is no longer considered outstanding, and the payor can reconcile the payment with the pending transaction.
However, if the payee delays depositing the check, then the payment does not clear the payor’s account. The amount of the check still cannot be used by the payor, as it’s promised to the payee, even though the bank account balance has yet to reflect the check payment.
Does an Outstanding Check Expire?
Banks set their own policies for how long they consider a check valid. Sometimes, this information is printed on the check itself. You may see, for example, "void after one year" or a similar message. When the check reaches this expiration date, it is no longer valid, and the bank the check was written from may not honor the payment. Even if this policy isn't written on the check, most banks have policies around check expiration. Ask the check's originating bank if you’re unsure of how long you have to cash or deposit a check.
Risks Associated with Outstanding Checks
Outstanding checks may cause issues for both the payor and the payee. On the payor side, it creates the need to carefully track uncashed checks so that money doesn’t get spent on other things. However, if your budget is handled appropriately and all checks are marked as pending, you’ll know not to spend that money.
Potential for Overdrafts and Insufficient Funds
What happens if you forget about an outstanding check? If that money is spent on something else, you may not have enough money in the bank account to cover all your promises to pay. As a result, your bank account balance may fall below $0 and incur overdraft fees. It's possible that the bank could also decline to honor the outstanding check, as well.
The payee will find the money didn't arrive in their account, which could, in turn, even cause them to overdraft their own account. As a result, the payee could get charged their own overdraft fees if they were counting on that money and spent it. You could also be charged additional "returned payment" fees.
The Risk of Stale Checks and the Need for Stop Payments
On the payee side, outstanding checks create a risk of expiring or becoming "stale." When this happens, the check can’t be cashed or deposited, and the payment must be reissued or made another way. Holding on to checks for a long time also increases the likelihood that they will get lost or destroyed before they are cashed or deposited.
Putting a stop payment on a misplaced or stale check may prevent issues down the road, especially if there's a concern that it could fall into the wrong hands. However, this doesn't always solve the problem, as it costs a fee to the payor and is only valid for a limited time.
The Costs of Outstanding Checks
An outstanding check doesn't cost anything beyond the paper it's printed on. However, having to cancel or put a stop payment on a check can be costly. Many banks charge a fee for this.
Also, outstanding checks may prove a hassle for an otherwise careful consumer. Keeping track of multiple uncashed checks over a long period of time makes it easier to accidentally spend the money that was set aside for a check and incur overdraft fees.
What to Do if You Have Issued or Received an Outstanding Check
All checks are outstanding from the time they are written until they clear. Whether they are outstanding for a few hours or a few months is dependent on the payee who determines when the check gets cashed or deposited.
If you have written a check, and it’s less than six months old, you can do the following:
- Keep the amount of the check reserved in your budget or banking app. Don't spend that money, and manually adjust the bank account balance to account for it.
- Reach out to the person to whom you wrote the check and ask if they are having issues cashing or depositing it. It may be that they didn't receive it at all, or the check was lost. If this is the case, put a stop payment on the check and write a new one.
If the check is older than six months, the check may be stale or void. Contact your bank for full details. If it is voided, you still need to put a stop payment request on the check. This prevents someone from trying to cash or deposit it and possibly having it affect your account balance. You can then work out a resolution with the payee, perhaps a different payment method.
Avoidance and Resolution Tips
Outstanding checks may sit unspent for a long time, but it’s possible to avoid overdraft fees and insufficient funds charges that stem from essentially spending the same money twice.
Consider Alternative Payment Methods
To completely avoid the issue, you could choose not to write checks. Instead, electronic cash payment methods, such as Zelle®, take the money out of your account faster. By not trusting the payee to take action, you remove the possibility that they will forget or put off cashing or depositing the check.
Issue a Stop Payment
Another option is to request a stop payment on a stale or voided check to ensure no one can cash or deposit it. This may be necessary if you've waited months or longer and can't get closure for the check. Anytime you make this request, mark it in your accounting software or ledger as "canceled." Doing so allows this money to be made available again.
Communicate with the Payee
Remember, if a payee doesn't cash or deposit a check, it may be because of a problem they are having. The only way to know is to follow up with them directly. Some common reasons for not being able to cash or deposit a check include:
- Losing a check
- Destroying a check
- Being unable to access a bank account to deposit the check
It may simply be that checks are not a good payment method for the payee. Inquire about other options, such as digital payments, that can take place quickly and reduce the chances of a payment being lost or expiring.
Keeping a Clean Financial Ledger
It's helpful to document every single check. Put the date of the check, the amount, the payor, and the check number in your ledger that came with the checkbook. If you use a digital budgeting tool or bookkeeping software, indicate this on the line item for the transaction, as well.
As long as you know not to spend money promised to someone else, avoiding expensive consequences such as overdrafts or insufficient funds fees is possible.
By being proactive and diligent in tracking all spending, you will have a better idea of your overall financial health and can make more suitable plans for the future. You can also commit to growing your financial literacy by learning about more topics around bank accounts and payment. PNC has many useful articles to help you make the most of your money.
