Legal Definitions - charge-back

A charge-back occurs when a bank reverses a provisional credit that was made to a customer's account. This typically happens when a deposited item, such as a check, is later found to be invalid or unpayable by the issuing bank. Essentially, if money was temporarily added to your account based on a deposit that ultimately fails, the bank will deduct that amount back out.

• Example 1: Insufficient Funds

  Maria deposits a check for $750 from a client into her business checking account. Her bank immediately makes the $750 available for her to use. A few days later, Maria's bank is notified by the client's bank that the check bounced because the client's account had insufficient funds to cover it.

  How it illustrates charge-back: Maria's bank will perform a charge-back, deducting the $750 from her account. This is because the initial credit was provisional, and the deposited check was ultimately dishonored (failed to clear) due to insufficient funds.

• Example 2: Stop Payment Order

  A local charity, "Helping Hands," receives a $1,000 donation check and deposits it into their organizational bank account. The bank provisionally credits the account, making the funds appear available. The donor then realizes they made a mistake in the amount and issues a stop payment order on the check with their own bank.

  How it illustrates charge-back: When Helping Hands' bank attempts to collect the funds from the donor's bank, it will be informed of the stop payment. Helping Hands' bank will then initiate a charge-back, removing the $1,000 from the charity's account because the check was dishonored due to the stop payment order.

• Example 3: Forged or Counterfeit Check

  John deposits a check for $2,500 he received from an unfamiliar source into his personal bank account. His bank provisionally credits his account, making the funds accessible. A week later, the bank's fraud detection system identifies the check as a sophisticated forgery and determines it was never authorized by the supposed payer.

  How it illustrates charge-back: John's bank will execute a charge-back, removing the $2,500 from his account. This demonstrates a charge-back because the initial credit was provisional, and the underlying deposited item (the forged check) was ultimately determined to be invalid and unpayable, leading the bank to reclaim the funds.