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What happens when I overdraft my checking account?

If you have a checking account, there is a chance that you have run into an overdraft situation. For most people, an overdraft is not intentional. Rather it happens because of a simple math error or because two people using one checking account do not communicate with each other about what checks have been written on the account.

But regardless of the reason it happens, what if you do not have the money to repay what you owe to the bank? Should you consider bankruptcy as an option to get out of the situation?

What is an overdraft?

An overdraft is when you take more money out of your checking account than you actually have in it. It can happen when you write one or more checks whose total value once cashed exceeds the balance of funds you have in the checking account. Use of a debit card coupled with the cashing of checks may also result in an overdraft on a checking account.

What happens with an overdraft on a checking account?

While some banks have initiated policies to prevent overdraft, many banks still allow it because it gives them the opportunity to charge the account holder an overdraft fee (and therefore make additional money for the bank). The bank will expect the account holder to pay the overdraft fee and repay the overdraft amount.

What if I cannot repay the overdraft amount? Should I consider bankruptcy as an option?

If you have an overdraft on your checking account, ideally you should work with the bank to repay the overdraft amount and any overdraft fee. However, you should generally speak with the bank to ask if they would be willing to waive the overdraft fee. But what happens if you cannot repay the overdraft amount?

Banks have a fair amount of power when it comes to collecting money owed to them. Therefore, if you cannot repay the amount you owe right away, it is generally a good idea to attempt to work with the bank to arrange a payment plan you can afford.

If you have a balance in another account with the bank, the bank will within a set number of days use that account balance to help repay what you owe. While certain types of funds are exempt from creditors in a bankruptcy situation, such as funds from a pension or Social Security check, that protection generally does not apply in a situation where you owe money to a bank. The bank can still seize funds from such an account.

Most banks use a service called ChexSystems. ChexSystems is essentially a credit check on an individual related to banking institutions. Therefore, if you have an overdrawn checking account with one bank, another bank will likely be able to learn about it using ChexSystems and may not allow you to open a new account.

In addition, if the bank is unable to collect the overdraft amount, they may send the balance to a collection agency and they will report the failure to pay on your credit report.

Finally, keep in mind that bankruptcy is designed for people who are in a seriously negative financial situation. Bankruptcy also has a long-term negative impact on a person’s credit rating. Therefore, in general bankruptcy is not a good option if the amount you owe is only a few hundred dollars. The fees associated with filing bankruptcy alone make bankruptcy a bad option for many overdraft situations.

What if I still want to consider bankruptcy and need to speak with someone about it?

Keep in mind that the information above is general in nature. Every situation is different so the above answers may not exactly address your circumstances.

If your financial situation is serious enough such that you do need to consider bankruptcy or you have other questions, you should complete the form on this page. A bankruptcy attorney who knows the bankruptcy laws in your state will get in touch with you to talk through your specific situation and advise you on what the best option is for you. Remember this initial conversation is completely confidential and does not obligate you to anything further.

Therefore, you have every reason to get the help you need today.

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