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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.
Bank accounts can and often do get sent to collections. If you overdraw your checking, savings or money market account and don’t deposit the funds to repay the overage in a timely manner, the bank can send the account to its collection department or a debt collector.
You’re charged an overdraft fee when the value of the items presented for payment costs 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.
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.
If you’re not aware of the monthly or extra fees that your bank charges, you may not have enough in your account to pay them. The bank will still debit the fees, however, which can put your account balance in the red. Here are some common fees to be aware of:
You can reduce the chances of overdrawing balances by checking your account regularly and keeping an eye on the transactions, deposits and fees that are coming through. Other tips to avoid overdrawing your checking account include:
Understanding what happens when your bank account goes to collections can ensure you know what steps to take to fix it and how to keep it from happening again. It’s important not to assume that your bank will just charge off the debt.
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.
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. If you have overdrawn accounts, unpaid balances or a history of bounced checks, it can impair your ability to open new accounts.
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.
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.
In general, you need to pay the balance of the debt to get any account out of collections. If the account is in the bank’s department of collections, you may be able to just deposit 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 have closed the account and sent 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. You’ll have to pay the debt collection company to get the account to paid standing.
Once your overdrawn bank account enters collections, there’s a specified amount of time during which a bank or debt collection agency can sue you. The window of time 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 you still owe the amount but you can no longer be sued.
If 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.
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.
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 that 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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