A notice of dishonor is a document that is prepared by the holder of some type of promissory note, check, or other bill of exchange that is rejected when presented for payment. This type of formal notice is forwarded to the issuer or endorser of the note, notifying him or her of the rejection. While there is no uniform format for a notice of dishonor, most will include data such as the nature of the instrument, when it was presented for payment, when it was rejected, and what type of action is required to correct the problem.
One of the most common examples of a notice of dishonor is the document forwarded to bank customers when a check that is deposited into a checking account is not honored by the issuing bank. This typically occurs when the account that the check is drawn upon does not have sufficient funds to cover the amount of the instrument. The notice will alert the bank customer that the check has been rejected and the amount of that check deducted from his or her available balance. When fees are assessed for processing returned checks, that amount will also be included as part of the dishonor notice detail.
The same general approach is used when a promissory note is presented and rejected. Notification is sent to the endorser of the document, including details surrounding when the note was rejected and what type of actions have resulted from that rejection. This formal notice allows the endorser to determine what to do in terms of contacting the issuer of the document and making arrangements for some other type of payment to be tendered.
In some nations, the notification sent by the endorser to the originator of a rejected financial instrument is also considered a formal notice of dishonor. Often, this document includes all the details provided by the bank or other financial institution, but also serves as formal notice of what the issuer must do to in terms of paying the face value of the original instrument, plus any fees or additional charges assessed by the endorser. It is not unusual for this formal notification to set a time limit for complying with the demands of the endorser, and also provide details of which actions will occur is the demand is not met.
For example, an endorser who notifies the issuer of a check that has been returned may require that the issuer pay the face value of the check plus the out of pocket expenses suffered by the endorser as a result. Should the issuer fail to do so within the period specified, the endorser may turn the check over to the check fraud division of the local law enforcement agency. That agency then takes steps to arrest, prosecute and eventually collect the amount due the endorser, along with court costs and other fees. By choosing to comply with the terms outlined in the notice of dishonor, the issuer saves a great deal of time and money, and avoids having a record with local authorities.