What Happens If a Bank Closes Your Account With a Negative Balance?

A negative balance in a bank account means the amount of money in the account has fallen below zero. This often happens when transactions, such as debit card purchases, automated payments, or checks, exceed the available funds, leading to an overdraft. While some banks may cover these transactions, they typically charge fees, effectively putting the account into debt.

Bank Actions and Collection Process

If a bank account maintains a negative balance, the bank initiates a process. The bank first identifies accounts with insufficient funds, allowing a grace period for the account holder to deposit money and cover the overdraft. If the balance remains negative, the bank will typically notify the account holder through various channels, including mail, email, or phone calls, about the outstanding amount and the potential for account closure.

This closure can occur after a series of repeated overdrafts or if the negative balance remains unpaid for an extended period, sometimes after 30 to 60 days. Once an account is closed, the bank’s internal collection departments will attempt to recover the outstanding funds through direct communication with the former account holder. This initial phase focuses on direct repayment before escalating to external measures.

Your Financial and Reporting Consequences

Overdraft fees are a primary concern, with banks commonly charging between $15 and $37 per overdraft transaction. Some institutions may also impose extended overdraft fees, which are daily charges of $5 to $10 if the account remains negative for several days.

If the negative balance and associated fees remain unpaid, the bank may eventually sell the debt to a third-party collection agency. When a debt is sent to collections, it can negatively affect your credit score, particularly if reported to major credit bureaus. Payment history is a significant factor in credit scoring, and a delinquent account can remain on your credit report for up to seven years.

Beyond credit scores, an unpaid negative balance can severely impact your ability to open new bank accounts due to consumer reporting agencies like ChexSystems. Banks report involuntary account closures, especially those due to unpaid negative balances or suspected fraud, to these agencies. ChexSystems collects information on banking history, including overdrafts and unpaid fees, and this negative record can remain on file for up to five years, potentially making it difficult to open a new checking or savings account at most financial institutions.

Resolving a Negative Balance

The first step involves communicating with the bank or the collection agency now responsible for the debt. Contact them to understand the exact amount owed, including all accumulated fees, and to discuss potential repayment options.

Repayment options often include making a full payment if feasible, which can prevent additional fees and collection efforts. If a lump sum payment is not possible, you can typically negotiate a payment plan, allowing you to pay the debt in manageable installments over time. In some situations, especially if the debt has been sold to a collection agency, you may be able to negotiate a settlement for a lower amount than the total owed.

Once the debt is fully paid, it is crucial to obtain written confirmation, often referred to as a “paid in full” letter, from the bank or collection agency. This document serves as proof that the debt has been satisfied and helps prevent future collection attempts. After resolving the debt, you should monitor your consumer reporting agency reports, such as ChexSystems, and dispute any inaccuracies. While paying the debt does not automatically remove the record, ChexSystems must update the report to show the debt has been paid, which can improve your chances of opening a new account in the future.