To dishonor, in a financial sense, means to decline a document, such as a check or voucher, which requires a payment to be made. This usually takes place if the document has incorrect information or if other irregularities are present. For instance, if a check that was issued does not have enough funds in the issuer’s account to cover the amount stated, then the check can be dishonored on the basis of insufficient funds.
There are cases in which even checks with insufficient funds are covered by the bank, especially if the account holder has availed of an overdraft arrangement. However, if the amount exceeds that which has been stipulated in the agreement, then the bank has the right to deny payment. Care must be taken against writing bad checks, because such an incident can lead to serious legal action.
Checks may also be dishonored if the account holder has already contacted them to request that payment on the check be stopped. Such a request usually brings a penalty along with it, so this normally happens only when the situation absolutely calls for it. Also, if the check is too old, it may also be dishonored. The validity of a check is dependent on the territory in which it was issued. Some countries allow a year-long allowance, whereas others only give the payee six months from the date indicated on the check to cash it. In addition, a check may also be dishonored if the bank has a reason to believe that the signature has been forged, or that the person redeeming the check is unauthorized to do so.