A bank does not go into business to charge off bank accounts. It goes into business to make money. However, when an account owner has an account that reflects a negative balance, the bank is often left with no alternative. A charged off bank account has a negative impact on the bank, as well as on the account owner.
When a bank account has a negative balance, the bank often makes several attempts to contact the account owner to notify him of the situation. The bank also petitions the account owner to make a payment to bring the account into good standing. After a period of time (typically 60 days, depending upon the bank), the bank concludes that the account owner does not intend to clear the negative balance. As long as the negative balance is allowed to remain, it is a liability to the bank, so the bank may turn the debt over to a collections agency. The collections agency may be an in-house agency or a third-party agency, depending upon the bank. The bank then charges off the the account, taking it off its records and writing it off as a loss.
If a bank charges off a bank account, it does not mean the account owner gets off scott free. That debt is reported to consumer credit reporting bureaus, including ChexSystems, which collects data specifically on how a consumer handles deposit accounts at banking institutions. Once a charged-off bank account has been reported to ChexSystems, the negative data can remain on the account owner's consumer report for up to five years.
New Account Problems
Once an account owner is reported to ChexSystems as having a charged off account, it becomes difficult for that individual to open an account elsewhere. Most banks check the ChexSystems database for new applicants, and if an individual's name is in ChexSystems, the bank may consider him too big a risk to have an account. An individual with a charged-off bank account is more likely to be approved at an institution that offers second-chance accounts or by one of the few institutions, such as some credit unions, that do not use the ChexSystems database to review applicants.
Clearing the Debt
Just because the negative bank account has been charged off does not mean the individual no longer owes the debt. It simply means that the account has been taken off of the accounting books and is longer be an asset to the bank. The charged-off account will continue to negatively impact his credit report until it is paid off. The account owner may obtain the name of the collection agency handling the debt from the institution that charged off the account. Before paying off the account, the account owner should obtain an agreement in writing from collection agency that it will report to the credit reporting bureaus, including ChexSystems, that the appropriate payment has been made to clear the debt. Once the account is paid off, the account owner's credit report and ChexSystems report will show that the debt has been satisfied. This can help the individual open an account elsewhere.
- Banking Questions: Had Charge Off, Want New Account
- Banking Questions: Should I Repay Bank for Charged Off Account?
- The Dollar Stretcher: How Charge Offs Affect You
- Credit Land: Charge-Offs Come Down in the Month of December for Bank of America
- ChexSystems Consumer Assistance: Consequences of Mishandling a Checking Account
- National Check Fraud Center: ChexSystems Information and Guide