When you enter into a deposit relationship with a bank, you are taking on the role of a creditor loaning money to the bank. If you overdraw your account, the bank assumes the creditor role, and you become the debtor. Banks normally charge off overdrawn accounts as past due debts after 60 days.
Overdrawing an Account
Banks assess overdraft fees, which normally cost between $25 and $35 when items are presented for payment against an account that exceeds the posted balance when all of the day's deposits have posted. However, a bank can also assess a fee if another party presents an electronic item for payment during the business day if funds are not available at that time; these fees are called Non-Sufficient Fund fees. Banks also charge an overdraft fee for the NSF item if the account remains in the negative after the day's deposits have posted. These fees can cause a minor overdraft to become a significant expense, and further fees are applied to each and every item that posts once the account goes negative.
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Charge Off Process
When an account goes into the negative, the bank must make a reasonable effort to notify the account holder. If the account holder's phone number or address has changed, the bank does not have a responsibility to track down the client. Banks normally place a credit-only freeze on overdrawn accounts within a few days of the overdraft, which means the customer cannot continue to access funds. However, the credit freeze does not prevent the bank from charging subsequent fees. Generally, after 60 days, the bank formally closes the account and charges off the debt.
Charged Off Accounts
When a charge off occurs, the debt does not disappear. The general bank passes the account onto the collections department. The collections department may choose to hire a debt collection firm in an attempt to settle the debt. The collections department also notifies credit reporting agency ChexSystems of the debt. ChexSystems maintains records of delinquent accounts, and most banks check ChexSystems records before opening accounts for new clients. Generally, you cannot open a regular checking account at a new bank if ChexSystems reports that you had a charge off elsewhere.
You may overdraw your account and end up having it charged off even if you do not actually overdraw it yourself. Many banks charge inactivity fees when customers do not use their accounts at least once every 120 days. These fees gradually erode account balances until the accounts become overdrawn. Some account holders forget to cancel monthly subscriptions when they close accounts, and the next time the item posts, it causes the account to re-open with a negative balance. Charged off checking accounts are also reported to credit bureaus and can limit the ability of an account holder to obtain credit.