Imagine having your car break down on the jam-packed Harbor Freeway in Los Angeles. You call a tow truck, only to have the towing company tell you that your debit card has been declined.
While that would be a nightmare by itself, it gets worse. You call your bank, only to learn that your accounts have been frozen. The bank explains that your name has been placed on ChexSystems, hangs up and leaves you stranded on the side of the highway in southern California.
You've never heard of ChexSystems? Neither had the woman who actually lived through this scenario. Turns out that an old, and nominal
overdraft charge caught up with her, and ultimately cost her a large measure of her financial freedom.
She's not alone, either. Visit the online forum of
ChexVictims.com, and you'll find more than 300 stories about lost checking and savings accounts. Each post boils over with frustration and confusion, many people left wondering why they lost their banking privileges due to something they didn't even know existed.
Are You at Risk?
According to the
Consumer Debit Resource Web site, ChexSystems is a network whereby financial institutions share information on mishandled checking and savings accounts. This central system, maintained by risk management company
, allows banks and other firms to better assess how reliable their customers are.
Joshua Turnbull, senior marketing manager with eFunds, says the data, both positive and negative, that are collected "form a critical piece to protect financial institutions" from losses and identification theft, along with helping them comply with federal regulations and meet account-opening goals.
For consumers, a ChexSystems report is similar to a black mark on an individual's credit report. The most common way to get your name added to ChexSystems is to be overdrawn to the point where your bank closes your checking account.
Nearly every major bank utilizes ChexSystems as a means of protecting against fraud and loss, including
Bank of America
"In legal terms, writing a bad check is fraud," says Debbie Lonergan, the content editor of Loan Alliance, a debt solutions company. "Banks use ChexSystems to protect themselves. From the bank's perspective, this logs people that write bad checks so that they can't become a risk and fraud issue."
However, Lonergan says banks won't overreact to a single mistake, meaning that one misstep will most likely not land someone on ChexSystems.
"It's usually a history of bad-check writing that means there is an intention of defrauding," she says. "Obviously, everyone makes a mistake, whether a direct deposit doesn't hit an account on time, or if someone post-dates a check."
Rallying Against the System
Criticism of ChexSystems abounds. Information on the report is very limited, in that no monetary amounts are attached. In other words, if you ended up on ChexSystems and tried to apply for a new account, the financial institution you are applying to won't know whether you were in debt with a former institution for $5 or $500,000.
Most consumers might believe that paying off the debt will erase the problem, and in fact each network member is obligated to note any debt that has been settled.
Unfortunately, that's not the end of the story. When a bank submits a report to ChexSystems, it stays on file for five years, unless the bank itself requests removal. That leaves consumers with little recourse when they encounter an unresponsive or uncooperative bank, because in all likelihood they will be prevented from opening another account until the five years have passed.
Tobin Titus founded the ChexVictims Web site after undergoing a painful experience shared by many others. After he closed a checking account that had been in good standing for years, a credit card with the same bank remained tied to that closed account.
The trouble arose because Titus had been paying off his credit-card charges through an automatic plan that withdrew funds from the checking account. Because the checking account no longer existed, his bank deemed that as fraudulent activity, and his name went on ChexSystems.
According to Titus, ChexSystems doesn't report your entire history with a bank account, unlike other credit-rating agencies.
For instance, when an application is filed for a credit card or loan, the issuer will pull a credit report that captures both positive and negative history. With ChexSystems, banks and other financial institutions are only alerted if your information is tied to a negative report.
"That is hardly enough to make a sound account decision on, but banks have been doing it for years," Titus laments.
Avoid the Pitfalls
Many institutions argue that with identity theft on the rise, ChexSystems has become a necessary evil. However, it seems that even the simplest of mistakes can snowball into much larger problems that linger for years.
One Houston native named Melissa, who requested that her last name be withheld, had an account with Bank of America that went into the red by roughly $200 after she was laid off from her job.
"I opened an account with Wachovia when I got another job," she says. "It was totally my fault, but I had not yet contacted Bank of America to make arrangements to pay off the account."
After Melissa made several purchases on
with a PayPal account that pointed to her old Bank of America account, a torrent of transaction and overdraft fees ballooned the outstanding balance to $1,600. It didn't take long for her name to be put on ChexSystems on the suspicion of fraud.
"Wachovia immediately closed my account, which was in good standing," she recalls. "They froze my account. I had no access to my money without going into a branch to withdraw it. I have been applying for checking and saving accounts since they closed my account, and no one will touch me."
While Melissa admits the whole ordeal could've been avoided if she had paid closer attention, her placement on ChexSystems has evolved into an even bigger nightmare.
"I know that it's my fault, and I am not trying to blame anyone, but I don't know what to do now," she says. "My employer requires a bank account to process payroll, and I can't even get a savings account."
How to Recover
Landing on ChexSystems doesn't have to be a five-year death sentence. You may have a negative report in the network, but it's ultimately your bank's decision whether to close your account or not. Working closely with your branch can sometimes yield positive results.
For those who have their accounts ultimately closed by their issuing bank, the slow crawl out of the ChexSystems hole can be a difficult one, but there are steps you can take should you be denied a checking or savings account due to a negative report.
First, anyone can obtain a free copy of their report through ConsumerDebit.com. That report contains any positive and negative data.
"Just like any other consumer report, consumers may dispute items that are inaccurate," says eFunds' Turnbull. "Over 1 million consumer requests are handled every year through a dedicated consumer relations team that acts as a liaison between consumers and data furnishers
including financial institutions and retailers."
If the information listed on the report is accurate, consumers should first pay off the debtor bank and request removal from ChexSystems. However, many who ask a bank to remove their entry come away defeated. Titus, for example, was forced for two years to cash his payroll checks at the bank that the checks were drawn from.
eFunds also operates GetChecking, in conjunction with the University of Wisconsin. The GetChecking program is designed to increase financial literacy with the hope that people can obtain a new account after having possibly mismanaged their previous accounts. In 2006, more than 5,000 consumers completed the program.
For some, though, paying off an old debt simply isn't an option, making it nearly impossible to get a new checking or savings account with large institutions like Bank of America or
. Thankfully for them, there are smaller banks nationwide that do not belong to the ChexSystems network.
Loan Alliance provides a report of banks that do not subscribe to ChexSystems," says Lonergan. "Our success rate is good. We also help keep people from being blacklisted while getting their credit and banking history in order."
Additionally, ChexVictims.com and other related message boards have lists of financial institutions and success stories generated by users. Many of these smaller, local banks offer probationary periods with new accounts. While there are certain restrictions that could last for years, consumers are still able to write checks and deposit money.
Titus, however, believes that banks should ditch ChexSystems completely and find a different way of assessing risk.
"The common thread that I find is that these are not people setting out to defraud the banks," says Titus. "They simply need a checking account to make it by in this world."