How an Old Checking Account Can Come Back to Haunt You

October 26, 2020 &• 5 min read by Bob Sullivan Comments 4 Comments

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Old checking accounts can become troublesome if you’re not paying attention to them. Whether they’re overdrawn before you move on to another account or become overdrawn because you’re not monitoring them regularly, they can leave you on the hook for debt.

If you’re not careful, old bank accounts can even affect your credit and the amount your debt will cost you over a lifetime. Understanding how accounts become overdrawn can help prevent these actions from taking place. Find out more about the process and whether a bank can sue you for an overdrawn account below.

How Checking Accounts Become Overdrawn

Overdraft Fees

You’re charged an overdraft fee when the value of the items presented for payment cost more than the available funds in your checking account. Overdraft fees typically range between $25 and $35. If your bank covers the overdraft item, you’ll have to pay back the total overdrawn plus the fee to bring your balance back in line.

For example, if you have $50 in your account and use your debit card for a $100 purchase, your bank might choose to honor the payment while also charging a $25 fee. That means you’re now $75 overdrawn and you owe that money back to your bank.

Non-Sufficient Funds (NSF)

Banks charge a non-sufficient funds fee if an item is presented for payment and funds are not available. Though this amount might be less than an overdraft fee, these “return fees” continue to add up. Each new item presented for payment while your checking account is negative incurs a non-sufficient funds fee.

Other Fees

ATM fees, monthly maintenance fees and inactive account fees are just some items that might eventually cause your account to be overdrawn. If you aren’t using an old account and the bank charges an inactive fee of $7.50 a month, for example, eventually the account may run out of money and have a negative balance.

Ways to Avoid an Overdrawn Checking Account

You can reduce the chances of overdrawing balances with regular account maintenance. Other proactive tips for doing so include:

  • Opting out of automatic overdrafts so payments are only made with the funds in your account. If you try to use your debit card and there’s not enough money in your account, the purchase will be declined.
  • Switching to an account that doesn’t charge overdraft fees. Some banks allow you to connect a savings account to your checking account. Overages are drawn from your savings often without any fees, or a much smaller fee being charged.
  • Using bank alerts to stay updated with your account balance.

How to Fix an Overdrawn Account

To fix an overdrawn account, you must bring the balance back to positive. You do so by depositing funds into the account to cover the amount you owe the bank. For example, if the account is overdrawn by $90, you might deposit $100.

An old account can present some challenges, though. If an old account has a negative balance you haven’t addressed, the bank may close the account and send the debt to collections. The process is known as a charge off, and your bank usually initiates this after your account has been past due for a period of around 60 to 90 days.

The Collection Process and Consequences for Overdrawn Accounts

Once an overdrawn checking account is closed, it’s usually sent to a bank’s collections department. Sometimes the bank hires a debt collection firm to help recover these funds.

Can You Get a New Checking Account If You Owe Your Current Bank?

Collections departments also will often put your checking account into ChexSystems, which maintains a record of delinquent bank accounts. Many banks check this service before allowing customers to open new accounts. This can impair your ability to open new accounts.

Does an Overdrawn Bank Balance Hurt Your Credit?

Simply overdrawing your account won’t hurt your credit if you take care of the issue right away. However, overdrawn balances that are sent to collections can also show up on credit reports as negative items. This can reduce your credit score and make credit harder or more expensive to get.

Can a Bank Sue You for an Overdrawn Account?

If you don’t know about an overdrawn account or ignore it, the bank could eventually take legal action against you. The amount your account is overdrawn is a legal debt you owe, which means the bank can sue you and use legal remedies such as wage garnishment to get the money.

What Is the Statute of Limitations on Collecting Overdrawn Bank Account Debt?

Once your overdrawn bank account enters collections, there is a specified amount of time in which a bank or debt collection agency can sue you. The window for legal action is referred to as the statute of limitations.

Bank debts are considered unsecured debts, and the time frame in which you can be sued varies by state. After this period, your debt becomes time-barred, which means that while you still owe the amount, you can no longer be sued.

When a bank or collection agency tries to sue you after the statute of limitations is up, you should seek legal help. The statute of limitations is often between 3 and 10 years and starts from your last payment date. If you make a payment on a charged off account, it resets your statute of limitations.

Statute of Limitations vs. the Reporting Period

The statute of limitations is not the same as the amount of time your debt appears on your credit report. The reporting period is set by the federal government and determines how long the record of your bank charge off will stay on your credit report. In most cases, debts are removed from your credit report after seven years.

Wrapping Up

Overdrawn checking accounts can cause long term problems if not taken care of as soon as possible. These accounts are referred to credit reporting agencies, and they can affect your credit for years. Your debt can also be sold to third parties who might resort to extreme measures to receive payment. It’s usually best to resolve your balance before it goes to collections whenever possible.

Unsure whether you have an old bank account lurking? Sign up for ExtraCredit to keep an eye on your reports and scores so you know when a collections account might be dragging things down. As an ExtraCredit member, you also get discounts on services, including credit repair from one of the leaders in credit repair service, to help you take control of your financial life now and in the future.

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