For how long is a draft check valid, and where do the funds sit?

Question

There is a fundamental difference between a personal check and a draft check. (I believe the distinction holds equally well in North America as in Europe, and possibly everywhere else).

If Tom writes a personal check to Jerry, the funds remain in Tom's account. When Jerry deposits the check in his account, the funds appear preliminarily in Jerry's account, but the check would take a few days to "clear". If the check bounces back with insufficient funds ("NSF"), the funds are deducted from Jerry's account.

Crucially, Jerry has only six months to deposit the check from the date Tom wrote on it. If Jerry misses that deadline, he has to ask Tom to write another check. All that is pretty basic and well understood. I'm asking instead about draft checks.

For a recent larger draft check, the bank teller said something alarming "Be careful. This is as good as cash." I hope he's wrong, and Tom would have a recourse if he issues a draft check to Jerry, but the check is lost/stolen from him on the way to Jerry. Regardless, I don't really care about this issue.

I'm wondering instead about two issues: Where does the money sit from the moment the sender's bank issues a draft check (it's obviously in the account of neither), and how long does the recipient have to cash the draft check?

The last issue is crucial because Tom may have sent the check to Jerry with a condition such as "cashing the enclosed check will be considered approval that this amount settles the expenses," or something of this sort, and Jerry may choose to take longer than six months before cashing this check and applying the caveat.

Finally, if, as I'm expecting, the bank holds the funds "in trust" from the moment Tom's bank issues the check until Jerry cashes it, what happens if Jerry never cashes the check? Do the funds become akin to those in a dormant account whose owner simply vanished (and which would be managed very differently depending on jurisdiction)?

P.S.: I understand that the whole point of a draft check is for Jerry to know that the check will not bounce. So if Jerry is supplying goods, he can immediately hand them to Tom upon receiving the draft.

Answer 1

To answer length validity and security implications of draft checks issued and negotiated within the United States, I am heavily addressing the common erroneous assumptions of where the funds sit while they're "in" a draft check and how to get them out.

Tl;Dr The existing answers are incomplete and in some ways dangerously misleading. Jerry can still be potentially defrauded by Tom, and even if the check is legitimately drawn and negotiable, Jerry may still experience delayed access to the funds.

The funds sit in an account held by the issuing bank. As long as the bank has sufficient funds, the check does. However, there are significantly more factors that go into whether a check will be returned unpaid ("bounce").

If I hand you $5000 in cash, will you give me $5000 in cash? Probably, and you'd probably be pretty safe. How about I give you a $5000 draft check, will you give me $5000 in cash without doing anything except looking at it to verify the check? I hope not (Cash America sure wouldn't) but people sell expensive goods with the "same as cash" attitude.

Remember: The only non-cash form of payment which cannot somehow be held, reversed or returned unpaid in the U.S. without consent of the receiving party is a payment order (a.k.a wire transfer)!

The draft check is "as good as cash" in the sense that the money for a draft check is withdrawn from your account before the check is negotiated (deposited). This does NOT mean that a draft check will not bounce, so Jerry is NOT as secure in handing the goods to Tom as if Tom had handed him cash, as it is still a check.

Jerry's bank will not receive the funds for Tom's draft check for an average 3 to 5 business days, same as a personal check. Jerry will probably have access to the first $5000 within two business days... provided that he deposits the draft check in person at his bank's branch or in a bank-owned ATM. In the United States, Regulation CC governs funds availability. Regarding official, draft, or tellers checks: "If the customer desires next-day availability of funds from these checks, [your bank] may require use of a special deposit slip."

Mobile deposit availability in the U.S. is NOT regulated in this way and will likely be subject to a longer hold on more, if not all, of the check!

Draft checks, don't, as a habit, "bounce" in the colloquial sense of "returned for insufficient funds." This is because they are prepaid and drawn upon a financial institution's account. Banks are insolvent far less frequently than other businesses or individuals.

Draft checks, tellers checks, official checks, bank checks, etc CAN, however, be returned unpaid if one of the following is true:

1. The check is older than the issuing bank's period in which they will honor it, or is stale dated (over 6 months) whichever is longer. The bank with which I worked made a habit of returning official checks over 6 months but paying personal checks over 6 months.

As an aside: an institution is not obligated to honor a stale dated check, but may do so at its discretion. If you have a personal check outstanding for over 6 months, it may still clear and potentially overdraw your account. In this case, contact your bank ASAP to process a reversal.

1. The depositing bank mis-scans the check and the issuing bank refuses the resulting data. I have seen systems mis-read which data field is which, or its contents. Also, there is the possibility the image if the check will be illegible to the issuing bank.

2. The draft check has been cancelled (stop paid). This can happen if: a) The check was fraudulently bought from the issuing bank using Tom's account b) Tom has completed an indemnification agreement that the check was lost or otherwise not used for its intended purpose, without fraud having occurred against Tom c) The draft check is escheated (paid to the state as unclaimed property). This case is a subset of case 1, but will lead to a different return reason stamped on the (image replacement document of) the check.

3. The draft check was never any good in the first place. Because of the perception that draft checks are as good as cash (they're not but are a lot better than personal checks), forgery and attempted fraud is shockingly common. These aren't actually underwritten by a real bank, even if they appear to be. The only money "in" them is what the fraudster can get out of you.

4. Jerry did not properly endorse the check before presenting it for deposit or otherwise negotiating it.

In my time in banking, I most commonly saw cases 3 and 4. Unlike most counterfeit cash, case 3 will fool Jerry and Jerry's teller. Tom gets an immediate payout (a car, a wire transfer, a payday loan, etc) and Jerry's bank doesn't know the check isn't valid until they call the alleged issuing bank to verify its negotiability, or in the case of smaller checks into lower-risk accounts, it is simply returned unpaid as fraudulently drawn.

To conclude: Call the alleged issuing bank's verification line before handing over the goods, always properly endorse your deposits, and address what happens if one does not receive or collect on prompt payment in your contracts.

Answer 2

A bank check is drawn on the bank itself. You gave the bank the funds backing that check at the time you purchased it. You can not get that money back except by returning the check to them. So, yes, effectively that check behaves like cash; the money us already gone from your account, and once you hand it over you can't claim it was forged or otherwise try to cancel the payment.