I recently had a reader ask me “What are the consequences of a bounced cheque while recovering from a bankruptcy?” Good question! And the answer you’ve all been waiting for is… “it depends.” Sorry for being so vague. I actually had to do a bit of research and make some phone calls to find the answer to this. But before I tell you about, let me tell you a quick story.
A Quick Story About My Own Experience With Bounced Cheques
BEFORE my bankruptcy, I was known for bouncing a few cheques and having insufficient funds in my bank account when automatic bill payments were supposed to take money out of my account. Not only is it embarrassing (I got over that part) but you end up paying an NSF (Non Sufficient Funds) fee of around $40 to your own bank, plus the company you bounced the payment to almost always charges a similar amount. Sometimes I’d end up paying $80 in NSF fees for a bounced $45 payment. Along with late charges I’d end up owing around $130 for a $45 bill payment. And then because the bank would instantly debit my account for the $40 NSF fee, I’d inevitably have another payment bounce (sometimes by only a few cents or a couple of dollars). It was a domino effect. Not very pleasant, especially when I was living paycheque to paycheque at that time.
But, happily I’ve improved my record keeping in an effort to establish and maintain perfect credit. Does that mean I haven’t had any NSF transactions since my bankruptcy? No. Unfortunately, I’ve had 4 bounced payments in the last 12 months. One was my fault. I screwed up and bounced a cheque and kept beating myself up over that for a week. I broke my own rule about never writing cheques any more, but thought I’d save the $5 fee for a money order.
Bounced Payments That Were The Fault of the Company
There were two bounced car payments from TD Financing services. NOT my fault. I made the payments in person at a TD Bank because by the time I got the money for my weekly car payment, I wasn’t sure if they money would be transferred in time to the bank account that the car payment comes out of. So to be sure the payment was received on time, I paid it through a teller at a branch of the TD Bank. Then I phoned TD Financing Services and asked them to cancel the payment for that week. I did this on several occasions. But twice, the person I spoke with at TD Financing Services made a mistake. The automatic payment debited the money from my bank account anyways. To add insult to injury, they charged me an outrageous $75 NSF fee and the next day started phoning me for my “returned payment” – even though I caught it before they did. After the second time, I switched to monthly payments and canceled the automatic payments. Now I pay manually using online banking.
My insurance company also made a similar mistake a couple of months ago. I had some unexpected expenses and was cutting it close for paying all of my bills. So I called my broker and asked if we could postpone the payment by two weeks, which they agreed to do. Only, they still attempted to take out the money on the original date. And of course, they payment bounced. They immediately billed me an NSF charge and warned me that if I did that one more time, I ran the risk of having my insurance canceled.
Getting Documentation to Prove The Error was Not My Fault
As you can imagine, I was not very happy about this. Since these bounced payments were clearly THEIR fault – not mine – they promptly waived the NSF charges on their end, and upon proof of the NSF charge from my bank, offered to reimburse me for those NSF charges too.
Naturally, I was worried about my credit rating. I’ve worked so hard for 3 years since my bankruptcy discharge to rebuild my credit and not have any blemishes to my credit rating. I’ve seen my FICO credit score go up and up. I immediately asked each of the respective companies to send me a letter of apology explaining that the error was their fault and not mine. I asked for those in case the NSF transactions made it to my credit report – or even in case it had any negative consequences with my bank.
Do Bounced Cheques and NSF Payments Appear on Equifax Credit Reports?
So now the answer to the question you’ve all been waiting for. To be sure I got the most accurate response, I purchased my Equifiax credit report, I phoned Equifax Canada to ask about NSF charges and their effect on credit reports and also phoned my bank. Here’s what I found:
No, NSF or bounced cheques/payments do NOT appear to have any impact on your Equifax credit report. I did not see any on my newly purchased credit report, so that was a relief. Does that mean you don’t need to worry about bouncing cheques while recovering from bankruptcy? NO! Not only will you incur NSF charges, it’s possible that the rules may change or some companies may have a policy to report NSF payments, even though I was assured by Equifax that this is not the case. I was actually very surprised by this, and wouldn’t be surprised if that will change in the future. So, don’t get too comfortable with it!
Why take the chance? If you think you’re going to bounce a cheque, do whatever you can to get some money to cover the cheque. Talk to your bank – see if they can cover it for a day or two. But if they offer to give you overdraft protection, be warned that they will probably do a credit check, resulting in a hard inquiry that will lower your credit score. Not to mention, you’ll almost certainly be declined due to your bankruptcy still appearing on your credit report – even if it was 5 and a half years ago!
There ARE Consequences Resulting From Bounced Cheques
But there’s another side to this! Although a bounced cheque or payment may not appear on your credit report, there are still consequences! You don’t get away that easily. Speaking from personal experience, I can tell you that cable companies, hydro/electric companies, credit card companies and banks WILL hold bounced cheques and payments against you (as well as late payments).
A few years ago, when I was moving, I needed to get my services hooked up at my new place. I don’t recall all of the details, but it seems that I needed a letter of reference from my last hydro company stating I had two years of good payment history. Of course, back then I wasn’t so careful and did not have two years of good payment history (either due to late or bounced payments), so I had to pay a $200 deposit which I would get back after a predetermined amount of time of good payment history.
I also recall asking my bank to increase the limit for withdrawals and holds on deposits made at the ATM (bank machine). The first time I asked, I my request was denied due to NSF cheques or bounced payments. I was told that I could reapply in six months. So you can be sure I kept my account in good standing. And sure enough, when I reapplied, I got approved. I was told there was no credit bureau inquiry done – it was all done internally using my credit history with that company.
So, although bounced cheques or NSF payments may not appear on your credit report (that’s the unofficial word – do not hold me to that) your credit with the company you bounced the payment to will most likely be impacted negatively. I’ve mentioned it before, but I’ll say it again: DON’T USE CHEQUES if you have a history of bouncing them! Pay the extra $5 and get a money order from Canada Post or your bank.
If you use automatic withdrawals from your bank account to automatically pay bills each month, build up a cash reserve of at least one month’s worth of bill payments.
How to Avoid Bounced Cheques and NSF Payments
Avoid using overdraft if at all possible. It’s easy to use, but very hard to stop using. Trust me. It’s a crutch you don’t want to get used to using. Paying it back feels even worse because you have to part with double the amount of money to pay your bills AND keep your balance above zero. And if you don’t have overdraft on your bank account – DO NOT apply for it. Not only is a denial almost guaranteed with a bankruptcy showing up on your credit report (because they WILL do a credit check), but it will also lower your credit score. So, why apply if you know you’ll be denied. Canadian banks do not like to extend any sort of credit to anyone with a bankruptcy appearing on their credit reports.
A year ago, I wrote an article on How To Eliminate Late Payments When Re-establishing Your Credit After Bankruptcy. Check it out for more good tips on avoiding late and bounced payments.
And, make sure you don’t pass any “rubber cheques” and keep smiling! 🙂