You only need to read the terms outlined in the deposit agreement you received when you opened your bank account to see just how easily a bank can shut down that account. The agreement will most likely say that your bank has the right to close an account at any time, for any reason and without prior notice. If this happens, you may or may not have the option to open another account at the same bank or another bank. Your options may include adding your name to another person's account as an authorized user, finding a bank that offers second chance accounts and resorting to non-bank alternatives.
The Reason for a Forced Closure
Common reasons for a forced account closure are too many bounced checks or overdrafts within a certain period, and suspected or confirmed fraud. Federal law enforcement agencies encourage banks to close accounts that exhibit warning signs of potential illegal activities. These include things such as possessing multiple accounts under a single name, having no employer on record but making frequent, high-dollar deposits and withdrawals, and providing a disconnected telephone number.
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What Happens Next
The steps a bank takes after closing your account determines your options going forward.
- If a bank closed your account due to a lost or stolen debit card, or confirmed fraudulent activity for which you are not responsible, the bank will usually open another account immediately.
- If a bank closed your account due to large numbers of bounced checks and/or overdrafts, you may have the option to open or keep a savings account you already have, but won't have the option to open another checking account. Some banks will also report the closure to the ChexSystems account verification database, where the information will remain on file for five years. If this happens, your chance of opening an account at another bank depends on whether the new bank checks the database.
- If a bank closed your account due to suspicious activity, it must file a Suspicious Activity Report with federal law enforcement agencies and the Department of the Treasury. If this happens, your chances of opening an account at another bank are non-existent.
Adding your name as an authorized user to an existing bank account, usually via a debit card, is not the same thing as a joint bank account. You're entitled to use the account, but do not share ownership or liability. Because the account owner is liable for your actions, misuse on your part can damage the account owner's standing with the bank and his credit profile.
Second Chance Accounts
A second chance bank account may be an option if your account was closed for mishandling funds. Some banks offer these as a specific type of account, and others offer second chance accounts as a business policy. However, many come with monthly fees and strict requirements such as maintaining a minimum balance and enrolling in direct deposit. The account might also not offer an ATM or debit card.
If you maintain a second chance account in good standing for a certain time, many banks will convert it to a regular account. Credit unions are a good starting point in researching second chance options.
A Non-Banking Alternative
A reloadable, prepaid debit card is a common non-banking alternative. Because a prepaid card doesn't allow you to spend more than you have, it can be useful for managing your money and eliminating overdraft and bounced check expenses. However, some cards do come with higher fees than checking accounts, so it's vital to research the available options before making a choice.