How Long Can a Bank Hold a Direct Deposit if the Account Is Closed?

A direct deposit transaction avoids check processing fees.

A direct deposit transaction avoids check processing fees.

When you open a new bank account, either a savings or checking account, you have the option of allowing direct deposits to be automatically posted to your account on pre-determined payment dates. Using the bank’s routing number and your account number, you can designate that your employer or other company that participates in offering direct deposits transfer the earnings directly into your account. The funds are usually immediately available for your use in the account on the next business day after the bank receives the money. Any direct deposit earnings sent to closed accounts will be returned to the sender.

Closed Account

A bank account may be closed by the account holder when there is a zero balance in the account. By contacting the financial institution and completing a written request authorizing the bank to close the account, the bank will immediately close the account if there are no unresolved transactions. Once the account is closed, the bank’s computer system will not process any further transactions for the account. Banks may reserve the right to close bank accounts when the account holders mismanage accounts, such as for recurring overdrafts or leaving the account in negative status for a specific number of days.

Outstanding Transactions

Some banks keep accounts active when there are unresolved bank transactions, even if you have authorized the bank to close the account. With most financial institutions, you may not voluntarily close an account until you have paid the outstanding balances and returned your account to zero balance. If the account is still active due to negative balances and other unresolved transactions, the bank will transfer a certain amount of the direct deposit funds to the account to clear the account.

Rejected Deposits

If your bank account has closed before you cancelled a direct deposit transaction or you cancelled direct deposit with your employer after your employer processed a payroll transaction, the funds will be sent to the closed bank account. The financial institution is required to return the funds to the sender, which may be your employer or other income source, with correspondence indicating that the account is closed. The company will not issue a check or forward the money into another account until the direct deposit funds are returned. The bank’s policy determines the time frame during which the funds must be sent back to the sender, which may range from five to seven days or seven to 10 days. The financial institution may also send you a statement explaining the transaction. With most financial institutions, this process is usually expedited in a timely manner when you have satisfied all outstanding balances.

Direct Deposit Cancellation

Many employers recommend that you cancel your direct deposit transactions prior to cancelling a bank account. A company may process payroll transactions several days before the actual date you’re scheduled to receive the money. Any direct deposit cancellations should be forwarded to the company as early as possible to avoid a delay in receiving your earnings. Once these transactions are processed, depending on company policies, you may not receive the funds until the next payroll date if your bank account has been closed.


About the Author

Marie Huntington has been a legal and business writer since 2002 with articles appearing on various websites. She also provides travel-related content online and holds a Juris Doctor from Thomas Cooley Law School.

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