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Customer Presenting Returned IRD to Paying Bank

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Question: 
If we receive an IRD as a return item, and charge back to our customer, if our customer presents the IRD to the paying bank (not us) can they be turned down to cash the item, or receive a check for the item?
Answer: 

If the IRD is a substitute check, it is supposed to enjoy the same status as the original check. If your customer is a business, the paying bank probably would not cash an original check; it's probably less likely to do so if the item is a substitute check. Some banks will exchange their official check for the previously dishonored item if it's a check. They may do the same for a substitute check. But many banks won't pay such a check (original or substitute) payable to a business, unless presented via in-clearings.

If the payee is an individual, the paying bank is a little more likely to pay a previously-dishonored on-us item if it's an original check. Legally, they should be just as willing to pay the substitute check.

However, it's also possible that, unless the drawee bank is familiar with substitute checks (more than in an academic way), there might be problems.

First published on BankersOnline.com 3/6/06

First published on 03/06/2006

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