Reference no: EM131660094

Question: As a businessperson (or as a consumer), you will certainly be writing and receiving checks. Both activities can involve pitfalls. Checks Drawn in Blank The danger in signing a blank check is clear. Anyone can write in an unauthorized amount and cash the check. Although you may be able to assert lack of authorization against the person who filled in the unauthorized amount, subsequent holders of the properly indorsed check may be able to enforce the check as completed. While you are haggling with the person who inserted the unauthorized figure and who may not be able to repay the amount, you will also have to honor the check for the unauthorized amount to a subsequent holder in due course. Checks Payable to "Cash" It is equally dangerous to write out and sign a check payable to "cash" until you are actually at the bank. Remember that checks payable to "cash" are bearer instruments. This means that if you lose or misplace the check, anybody who finds it can present it (with proper identification) to the bank for payment. Checks Indorsed in Blank Just as a check signed in blank or payable to cash may be dangerous, a negotiable instrument with a blank indorsement also has dangers; as a bearer instrument, it may be easily transferred as cash. When you make a bank deposit, therefore, you should sign (indorse) the back of the check in blank only in the presence of a teller. If you choose to sign it ahead of time, make sure you insert the words "For deposit only" before you sign your name. As a precaution, you should consider obtaining an indorsement stamp from your bank. Then, when a check is received payable to your business, you can indorse it immediately. The stamped indorsement will indicate that the check is for deposit only to your business account specified by the number.

CHECKLIST FOR THE USE OF NEGOTIABLE INSTRUMENTS

1 A good rule of thumb is never to sign a blank check.

2 Another good rule of thumb is never to write and sign a check payable to "cash" until you are actually at the bank. If you must write the check ahead of time, consider making the check payable to the bank rather than to "cash."

3 Be wary of indorsing a check in blank unless a bank teller is simultaneously giving you a receipt for your deposit.

4 Consider obtaining an indorsement stamp from your bank so that when you receive checks you can immediately indorse them "For deposit only" to your account.