Sanctions and the economic cost of nonpayment of checks—clarifications regarding the Supervisor’s guidelines related to suspending account restrictions in respect of checks without cover

  • The Supervisor of Banks calls on the public to act responsibly, to closely consider its steps and to be careful regarding sanctions and the heavy economic cost that is liable to stem from nonpayment of checks.


  • ​​ The Enforcement and Collection Authority emphasizes that although, due to the emergency situation, opening files and      debt  collection proceedings, including for checks that were refused, have been suspended, this does not eliminate the debts or      prevent subsequent procedures to collect them.
  • ​ ​​​​​​​​ ​The Banking Supervision Department clarifies the meaning of its guidelines to suspend the imposition of th restrictions,  particularly
​     ​ that this is a temporary suspension and not a final cancellation of the check being counted toward the imposition of a restriction.

 

The economic crisis resulting from the battle against the coronavirus has adversely impacted various and broad sectors in the economy. One of the phenomena seen in the updated data at the Bank of Israel is an increase in the share of returned checks, which has increased from approximately 2.5 percent of total checks presented for payment in routine times to about 6 percent in the current crisis, and thus an increase in the share of cancelled checks (stop payment order) from 0.35 percent to 2 percent.

 

As a result of the extreme change in economic conditions due to the coronavirus crisis, the Supervisor of Banks issued guidance to suspend restrictions due to uncovered checks, in order to avoid the negative impact on customers whose income has decreased markedly and who are liable to become restricted customers, However, it is important that the public understands that these guidelines do not cancel the restrictions (it is only a suspension) and that checks that currently are not counted toward the imposition of a restriction are liable to lead to a restriction at the end of the suspension period. In addition, it should be remembered that even for the cancelled check, the account balance will be examined, and it will be considered a check without cover should the account balance be insufficient, with all the ramifications listed in this notice.

 

In order to reduce the future adverse impact on private and business customers, it is important to us to clarify that besides the risk of imposing a restriction on the customers’ bank accounts, the cancellation (stop payment order) and nonpayment of checks can have a heavy economic cost, as detailed below:

 

1.    Sanctions and debt collection: If a check is returned for insufficient cover, or due to a cancellation notice (stop payment order), the recipient of the check has cause to open a collection proceeding via the Enforcement and Collection Authority (the Execution Office). The lack of a debt arrangement is liable to lead to various sanctions, including: attachments, imposing of a special restriction on all the customer’s checking accounts, restrictions on leaving Israel, revoking of the drivers license, prohibition on issuing credit cards as well as charging interest due to delay in paying the debt.

 

2.    Negative impact on the ability to receive credit and in the credit rating: Nonpayment of an uncovered check is reported on an ongoing basis to the Credit Data System and is liable to lead to a decline in the credit rating of individual customers, including businesses. The data on nonpayment of checks due to insufficient cover will be included in the credit data register and therefore in the customers’ credit reports as well, and are liable to adversely impact their credit rating. Thus, reports on alerts regarding the return of 5 checks under the Checks without Cover Law are also sent to the credit data register, which is liable to lead to a negative creditworthiness assessment. The inclusion of the data in the register, the negative creditworthiness assessment, and the adverse impact on the rating means that credit providers may refuse to extend credit to the customer at all, including by not renewing credit facilities in the customer’s other bank accounts, not increasing the credit facility in existing credit cards or not issuing new credit cards, and it is possible that the customer will not be allowed to pay with checks or credit when paying for an asset or service. In addition, in the future, due to the inclusion in the credit register and the change in rating, the interest rate on credit that the customer will receive could be higher than average.

 

3.    Adverse impact on the customers’ rating at the bank in which they manage an account: The nonpayment of a check due to insufficient cover is also recorded at the bank in which the account from which the refused check is drawn is managed, and is liable to lead to a negative record and a reduction in the customer’s credit rating in the bank’s risk model.

 

4.    A decline in the trust of business partners and third parties: In general, the cancellation of checks creates a crisis of confidence among business associates and among third parties with whom we are in contact. In the medium and long terms, such an adverse impact is liable to create significant difficulties in rebuilding business and economic relationships with those entities. It should be remembered that when there is a returned check, there could be significant negative impact to the check’s beneficiary, who relied on it.

 

Supervisor of Banks Dr. Hedva Ber said, “Besides the negative impact on trust and business relationships, the nonpayment of checks could have significant ramifications on the customer’s future ability to conduct economic transactions, his credit data and his rating in the financial system. I urge the public, at this time, to maintain a high payment ethic and to fulfill the commitments you have undertaken. If you are in distress and cannot make the debt payment, I suggest to hold a conversation with the entity to whom you gave the check, in order to reach an honorable understanding and agreement on the continued relationship between you, in a manner that will not necessitate the cancellation of checks and the arrival at situations in which checks are returned due to insufficient cover.”

 

Director of the Enforcement and Collection Authority Adv. Tomer Moskowitz said, “The Enforcement and Collection Authority was guided by the Minster of Justice to halt collection proceedings, but this is only a temporary halt; and in any case the debts are not being written off. Ultimately check recipients will be entitled to take all processes to collect their debt.”

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