An overdraft is not free money the bank gave you -- it is money you now owe the bank. When your checking account drops below zero and you do not bring it back to positive, the bank does not simply forget about it. There is a fairly predictable chain of events that unfolds over weeks and months, and knowing each step helps you decide where to step in. Below is what typically happens, in order, and what you can do at each stage to limit the damage.
The short answer
Leave a checking account negative and the bank stacks on fees first, then may use its right of setoff to take the money from your other accounts at the same bank. After about 60 days it usually closes the account, charges off the negative balance, and reports the mishandled account to ChexSystems. The debt is then placed with a collection agency or sold to a debt buyer, at which point it becomes ordinary unsecured debt that can follow the collection-to-lawsuit-to-judgment-to-garnishment path. It is a civil matter, not a crime, unless there was actual fraud such as knowingly writing bad checks.
What the bank does first: fees, setoff, and closure
In the early days the bank works to collect from you directly. Several things tend to happen:
- Fees stack up. Overdraft fees and non-sufficient-funds (NSF) fees can be charged per transaction, and some banks add a daily or "extended overdraft" fee while the balance stays negative. This can push the amount you owe well past the original shortfall. Fee amounts and rules vary by bank, so check your account agreement.
- Right of setoff. If you hold other accounts at the same bank -- a savings account, for example -- the bank generally has a contractual "right of setoff" to move money out of those accounts to cover the negative checking balance. This usually does not require a court order. It applies to accounts at the same institution, not at a different bank.
- Freeze and closure. The bank can freeze the account and, if it stays negative, close it. Banks typically charge off a negative balance after about 60 days, and closure often happens around that point.
This first stage is the cheapest place to fix the problem, because nothing has been reported or sold yet.
Charge-off and your ChexSystems record
When the balance has been negative long enough -- often around 60 days -- the bank "charges off" the amount. Charge-off is an accounting step that moves the balance to a loss category on the bank's books. It does not mean the debt is forgiven; you still owe it. Around this time the bank usually reports the closed, mishandled account to ChexSystems.
ChexSystems is a nationwide consumer-reporting agency under the Fair Credit Reporting Act (FCRA). It is the system many banks use to screen people applying for new checking accounts. It is not one of the three credit bureaus, so a ChexSystems record is separate from your traditional credit report. A negative ChexSystems entry can make it hard to open a new account, and such records generally stay for about 5 years. You have the right to a free ChexSystems report and to dispute anything inaccurate under FCRA Section 611. If you want to bank again after this point, see how to get a bank account after ChexSystems. Whether the overdraft also touches your credit score is a separate question covered in do overdrafts hurt your credit score.
Collections, lawsuits, and garnishment
After charge-off, the bank usually either places the debt with a collection agency or sells it to a debt buyer. Once that happens, the negative balance is ordinary unsecured debt -- no different in kind from an old credit-card balance. The path it can follow looks like this:
- Collection contact. A collector or debt buyer reaches out by phone and mail to try to get you to pay.
- Possible lawsuit. If it goes unpaid, the collector may sue, but only within your state's statute of limitations (SOL). The SOL window varies by state and by the type of contract.
- Default judgment. If you are served with a summons and ignore it, the court can enter a default judgment against you without hearing your side. Responding to a summons matters.
- Garnishment or levy. With a judgment, a creditor may be able to garnish wages or levy a bank account, subject to state and federal limits.
For a fuller walkthrough of each stage and your rights along the way, read how debt collection works.
Is it a crime, and what income is protected?
Not paying a debt is a civil matter, not a criminal one. There is no debtors' prison in the United States for simply owing money on an overdraft. The narrow exception is actual fraud -- for example, knowingly writing bad checks with no intent to make them good. Ordinary inability to pay is not a crime.
Some income is also protected from collection. Federal benefits such as Social Security and SSI generally cannot be taken through a bank's right of setoff, and a federal "two-month rule" protects roughly the last two months of direct-deposited federal benefits in your account from most garnishment. Protections vary by benefit type and by state, so if your account holds protected income and a levy or setoff appears, it is worth getting specifics for your situation.
How to limit the damage
The earlier you act, the cheaper and quieter the fix. Free-first steps:
- Contact the bank fast. Call before charge-off and ask whether you can repay the negative balance or set up a short payment plan. Banks would often rather collect from you than send the account to a third party.
- Pay before charge-off where you can. Clearing the balance before the account is reported can help you avoid a ChexSystems record and the new-account headaches that come with it.
- Ask for fee reversals. If fees are the bulk of what tipped you negative, ask the bank to reverse or reduce them. This is sometimes possible, especially for a first incident.
If the balance has already been charged off and handed to a collector, it is now unsecured debt, and you may be able to settle it for less than the full amount. Settling is not guaranteed, and it carries trade-offs: it can damage your credit, a forgiven amount over about $600 can trigger a 1099-C that may be taxable, and an unpaid unsecured balance can still expose you to a lawsuit and judgment within the statute of limitations. Weigh those before agreeing to anything in writing. See can you settle a negative bank account balance for how that works.
This page is general information, not financial advice.