When your leave your deposit account negative your bank can impose fees, freeze the account and eventually close your account. Bank accounts that are closed with negative balances are often reported to credit agencies and show up on your credit report as unpaid debts. These accounts negatively impact your credit score and remain on your report for up to seven years.
When your account falls into the negative your bank assesses a non-sufficient-funds fee on the item that caused the balance to drop below zero. If any other items post to your account after it goes into the negative, your bank can charge a NSF fee for the presentment of those items even if the bank opts not to pay the transactions. If you have multiple withdrawals on one day, your bank typically pays the largest items first and the smallest ones last. Therefore, you could get several NSF fees for small items if you also had one large check clearing your account on the day it went into the negative.
Many banks charge so-called "extended overdraft fees" if your account balance remains in the negative for more than a week. Therefore, even if no more items are presented for payment against your account, the negative balance can continue to increase. Banks attempt to contact account holders by phone, e-mail or even text message when accounts fall into the negative, and typically banks continue attempting to reach you while the account balance remains below zero.
Right of Offset
If you fail to contact your bank to make arrangements to settle your overdraft, the bank can conduct a review of your other accounts. If you have any other deposit accounts with a positive balance, your bank can withdraw funds from those accounts and use those funds to offset your negative balance. Banks can use the right of offset to extract funds from any account you are listed as an owner on, so if you are listed as an signer on a friend or relative's account, the bank can withdraw funds from it to settle your debt. State laws on the right of offset vary, but in many cases banks do not need to notify you before using the right of offset.
Closing the Account
Banks normally close overdrawn accounts after a period of 60 days, while credit unions close the accounts after just 45 days. The bank charges off your account, which involves closing it and forwarding your account information to the collections department. The collections department can notify credit bureaus of the debt as well as a company called ChexSystems, which provides consumer reports to banks. The collections department will attempt to collect the debt either directly or with the assistance of a specialist collection agency.
- Comptroller of the Currency Administrator of National Banks: Answers About the Right of Offset
- Banking Questions: Right of Offset Explained; September 2008
- Bankers Online: "Charge Off Period for Overdrawn non-ODP Accounts "; John Burnett; March 2006
- Bankers Online: "Procedure for Closing Overdrawn Account "; Ken Golliher; May 2006