Having a checking account is a must for many people worldwide as their primary day-to-day resource of funds.
However, many people are not aware of the conditions that come with such an account. You can blame this on the user or the bank, but the fact is, this lack of clarity can be a big problem.
This is especially true when users find themselves with a negative balance on their accounts. This can have devastating effects on your checking account and financial life. For example, you may be hit with overdraft or Non-Sufficient Funds (NSF) fees as it falls into the negative.
If you are charged with NSF fees and have difficulties paying them, you may find yourself in legal trouble. As these accumulate, it becomes more challenging to address the underlying issue and repay the original debt. It is a vicious cycle you must end as soon as possible.
Closing Your Bank Account
Some may consider the option of closing an account to avoid fees from accumulating further. Now the first question is, can you approach a bank account with a negative balance? While this may seem like a valid option, you may unfortunately not be able to do so. The bank can freely refuse to close the account until the account is placed into a positive status.
Even if you request to close the account, the most likely cause is that the bank won’t honor it. This is because as long as you have your account in the negative, you essentially owe money to the bank, and having you on record with them means that you still have that debt to be paid.
We have bad news if you think this sounds unfair: This is contemplated in most terms and conditions for checking accounts. If you were not aware, you might have missed it when reading the small print.
So What Now?
If you are still looking to close the account even when overdrawn, you will need to take other steps first. As you guessed, you will need to bring the account current before you can close it. How exactly can you go about this?
Going in the Black
The most straightforward and most obvious answer is to make a deposit or otherwise make a transfer to the account.
Any deposits to the account will go directly towards canceling that negative balance. This includes other sources of income to the report. Any direct deposit from your job or social security will be intercepted and contributed towards paying off the debt.
We’ve already gone into detail on bringing your account current again in our previous article so make sure to check that out.
The Closing Process
If you can set your account back into the positive, you’ll be able to close your account. This part is not that difficult. If you have any ongoing recurring payments, make sure to transfer those to your new account.
Once you have that done and have removed any remaining cash from the account, you can move to close the account. For this, call, visit or otherwise send a letter to your bank offices. You’ll have to fill out and sign an account closing form to make it official.
Now, you can’t go without a bank account, so it would always be a good idea to have a different one to receive payments and make transactions from.
Do also note that the same may be considered inactive if you do not make any deposits or withdrawals from the account in a long time. Should that happen, you may need to reactivate the account before you can close it, and doing so may have you going to your local branch to get it sorted.
Staying in the Red
Now, if you can’t bring your account to a positive state, this won’t be without consequence. Should that end up happening, your bank may end up closing your account directly. Usually, banks will give you around 60 days to set your account in order before this happens.
You may think that this may be the solution, but that may not be the case. The bank closing your account won’t save you from paying that fee that you have pending, and you will still have that debt, and the bank will report your account to ChexSystems.
ChexSystems is a consumer reporting agency for financial institutions. This can end up making opening a new account quite challenging at a later date. If you try to open a new account with another bank, the reporting agency will disclose the same issues.
More than 80% of banks and credit unions will use these consumer reports when considering an applicant. This means that if you are going to open an account with a bank, this is most likely to be checked. Many banks will decline opening requests from applicants that have been reported to these systems.
This is not the only problem you will face. A bank that closed your account can also sell your debt to a collection agency. Such an agency can also report the history to a credit bureau. Collection accounts will harm your credit score.
Depending on how much you owe them, these agencies may even consider suing you to obtain a judgment. Collection agencies are no joke, so make sure to take them seriously.
Dealing With a Closed Bank Account
Should your account have been closed but you have been able to recover financially, you will be looking to restore your previous status. For this, you can take a look at reinstating your old account.
Your account is closed does not automatically mean that your debt has been charged off. As per Federal regulations, the same will be considered unrecoverable after 60 days.
So what do you do?
For one, you want to contact your bank immediately. If your payment issues are due to fees from the bank, you may negotiate something with them. You also want to discover what the reason for the overdraft is. If it has been due to a fraudulent cheque, you may have that be addressed and resolved.
You also want to ask your bank about their reporting policy. Banks report to ChexSystems voluntarily, which means that you must clear your debt early and contact them immediately. You may thus avoid them filing a report at all. If they have already done so, you may still ask them to update the same to show that it’s been paid.
This may not be as good as not being reported, but it is a significant damage limitation.
In the case that your name has been reported to ChexSystems, your life is not over. The system will generally keep you on record for 5 years after a report, but they can remain for up to 7. Even if you pay the amount owed, this mark will remain on your account and spell trouble.
All in all, it’s a good idea to keep on top of your ChexSystem report. You are entitled to one ChexSystem report per year, which you can request on the official website.
Taking advantage of this report is a great way to ensure you don’t have any pending fee you are unaware of. After all, it not only lets you review the same but also disputes any erroneous claims. The faster you act on those, the better.
That being said, even if most banks do review ChexSystems when reviewing an application, not all of them do. Smaller and local banks will be more lenient in that regard, and they don’t see as many people applying, so they may be more willing to overlook some blemishes.
Even with that, it’s a great idea to ask about the bank’s application process in question. Having that information before you apply will help you avoid any inconveniences. Informing yourself about the process never hurts and can only help you.
Second Chance Banking
If you are having issues finding a bank that will forego these, you do still have the option of second-chance banking systems. These give you access to some banking services that will be more limited than the standard one but don’t check these reports. They are specifically made for this situation, so you may build up to a standard checking account faster with one.
Dealing With Debt Collectors
If your bank has sold the debt to a third party, you may end up hearing from debt collectors. These agencies will try their best to recover the debt from you, and they can be quite predatory and even try illegal tactics.
If you find yourself dealing with one, it’s a good idea for you to become familiar with your rights as a consumer. You want to become quite familiar with the Fair Debt Collection Practices Act or FDCPA that governs their practices, and this should let you know what you can do to stop them from harassing you.
Never Ignore Them
That said, make sure not to ignore them. These agencies won’t go away until the debt is paid, so make sure to address it. Knowing that, don’t rush to make a payment immediately. Consider your options and take your time to see how you can best pay it off.
Make sure to gather the needed information on the debt in question. Make sure that the debt that the agency is contacting you about is yours. Debt collectors must send you a debt validation letter that outlines the details of the debt.
If you’re still uncertain after that, you can send the collector a debt verification letter asking for more information. Mistakes in debt collection are common, and you don’t want to end up paying a debt that is not yours.
All in all, you do need to take debt collectors seriously. Their business relies on being able to recover the funds that are owed.
Avoiding the Nastiness
When you have been able to get back on your feet after account closure, you will be looking to avoid any similar issues in the future. You need to take a few steps and consider to make sure that this won’t happen again.
For one, make sure to keep up to date on your balance. You want to keep your finances in order so that similar issues don’t happen again. Adjusting your lifestyle and making sure to keep on top of your finances is a must. We’ve already covered this topic in the past so make sure to check out our article on Negative Balances.
All in all, when asking the question ‘Can You Close A Bank Account with a Negative Balance?’, the conclusive answer is no.
The fact that you are still in debt with the banking entity means that you need to resolve those issues first. Only when you have done that can you move towards the closing of the account. In addition, falling into trouble with the consumer reporting agencies can get you into deeper trouble.
On top of that, simply closing the account doesn’t mean that your debts will go away. Unfortunately, any outstanding debt will continue. This means that even after the ordeal, you will still need to find the means to pay.
All in all, we always recommend keeping up to date on your financial status. Keep an eye on your spending and what you are being charged to avoid any issues with your account. A bank account is an essential tool in any person’s toolbox nowadays.
Living without one can become complicated, so it’s always a good idea to keep on top of these matters.
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