As I explained in this thread, some months ago I had a huge amount charged by mistake to my credit card and, although I have not been able to straighten it out with the vendor, at least I got all my money back from the credit card company when I put the charge in dispute. That is the protection the credit card offers.
Now, for many years I have had my utility bills paid directly by the bank and never had a problem but the above mentioned incident got me thinking. If such an error happened by a utility company and they wiped out my bank account, would I have any protection or recourse?
I called the bank and the answer was “NO”. Once they pay, the money is gone forever and there’s no way to charge it back. I asked if I could put a cap on the amounts paid and they said NO. What it comes down to is that any and all of the utility companies that have access to my bank account can wipe it out and it is then up to me to try to recover it from them.
Given the state of things with shady charges by long distance companies, 900 numbers etc. I feel this is an unacceptable risk and I am revoking the direct debit authorization and will go back to writing checks. When I travel I can just send them a check in advance that would cover any charges for that period.
I was just wondering if anyone had anything relevant to add to this. Am I missing something or am I as unprotected as it seems?
No, sailor, you’re not missing a thing. Auto debit is fraught with risk, and the consumer bears it all.
When you sign up for auto debit, the form usually says “I allow X company to debit my account # YYYYYYYYY”. Sometimes a day of month (or range of days) is specified, but rarely is a specific amount included in the contract. That means the merchant has the authority to debit your account for any amount. If they debit you for the wrong amount it is strictly an issue between you and the merchant, the financial institution has no legal standing to get involved.
Stop payments on auto debits are possible, but rarely effective. Stop payment orders usually require a check number and/or amount. There is no check number on an auto debit, so that won’t work. Since no amount is specified, the merchant has your permission to change the draft (often by $0.01) so that it no longer matches the stop order. Presto! They have your money again. The only other way is to stop all auto drafts from that merchant, but they can sometimes (depending on the contract you signed) submit the draft under an affiliate or secondary name. You’re screwed again.
There is also no “end date” specified, so there is no guarantee that they will stop debiting you when your obligation is fulfilled. I have seen many cases where the customer account had to be closed and a new account number isssued in order to stop auto debits.
Your recourse is always against the merchant. In the mean time your money is in their hands.
The vast majority of auto debit errors I have seen are honest mistakes and are corrected quickly by the merchant. Sometimes, though, a sleazeball company will take someone for every dime in the account. The question to ask yourself is “Would I give this company and all of it’s employees a book of blank checks on my account to do with as they please?”. If the answer is “no”, then don’t do auto debit. Having been in banking for many years, my answer (even to my own employer) is ALWAYS no.
Yup, I just realized it. I was lucky that the incident I had was through the credit card and not through the bank account. I am revoking my direct debit payments and will start writing checks once again.
No, you’re not really missing anything. Whenever you authorize someone to access your account, you’re pretty much opening yourself up to the possibility of bad things happening. Some folks are willing to run the risk for the convenience.
Something many people don’t realize, not having read the fine print on the authorization, is that when you authorize your employer to deposit your pay directly into your account, you’re also authorizing them to make withdrawals from your account in order to correct errors in payment amounts, etc. Admittedly the risk in this case is likely to be lower than in the case of someone who’s authorized to withdraw whatever they happen to think you owe them at the moment, but nevertheless I cancelled direct deposit when the parent corporation of my former employer was in a bad way financially and I’d learned what a set of vicious rat bastards the CEO, president, and CFO really were. I could just imagine some situation where they’d claim that they’d “mistakenly” paid me for the last year and had “corrected” that error. I didn’t trust them when I didn’t have my eyes on them, so I pulled the authorization (I even started cashing their checks at their bank the same day they were issued, instead of depositing them at mine).
The bottom line is that anyone who is authorized to access your account can cause you an enormous amount of grief, and your recourse under those circumstances is very limited.
Is that true across the board? A few years back my mother’s employer goofed by overpaying her several hundred dollars, and they asked her to write a check back to the company.
I have always had direct deposit when my employer offered the option, and I haven’t had a problem in the last seven years. I much prefer that to a) cashing my check immediately with a check-cashing card & then having to walk around with the cash until I could get to the bank, or b) having to run to the bank to deposit the check and wait for it to clear over several days, leaving me with little or no cash for paying bills that are due at the beginning of the month. (I should say that in my present job, I am paid once a month on the last business day of the month.)
In fact, I’ve had my income tax refunds direct deposited as well - worked like a charm.
Those “fake visa” cards that are actually debit cards are deadly as well. If someone swipes it and starts shopping, they’re taking your hard-earned money right out of your checking acct, and who knows when or if the bank will get around to putting it back in. If you order something and get ripped off, you have NO chargeback rights at all. Scary.
I’ve recently become aware of what a complete and total ripoff even real credit cards are. Fake late fees, dividing up a balance so they can get more interest. It makes me want to just pay cash for everything. I chopped all my credit cards up. I have one visa for emergencies, and I made sure it has a grace period, and a gas card. Now I can’t get into too much trouble during a spending spree, and if I ever have my wallet stolen, I won’t be calling 15 CC companies!
check out http://www.clarkhoward.com for lots of good tips on ripoffs and mutual funds. It’s scary out there, and it’s amazing what people will stoop to to get a few more bucks out of YOUR pocket. You really have to keep an eye out.
One of these days I’m going to start reading the fine print (and actually trying to understand it) before I sign anything. I guess I should consider myself lucky that nothing awful has happened to me yet.
I think you guys might be overlooking something. I worked for about four years in checkcard fraud detection and then later in Risk Mgmt for a large bank. The customer has recourse in the bank for electronic debits mandated by the Electronic Funds Transfer Act called Regulation E. The bank I worked for lost about 10 million dollars a year reimbursing customers when their wallets or purses got stolen and money was spent. I’m not completely positive about direct debit from your checking account (called ACH or Automated Clearing House debit) but I would be VERY suprised if they said you have no recourse. I don’t know what bank you patronbize sailor maybe the person you talked to didn’t know himself.
I just got a job with a new startup online bank called and I’m writing their Reg E dispute procedures.
JCorre, that link does not work, not because you need to do anything but because it’s bad (probably incomplete)
My bank is Citibank here in DC. I did talk for a while to a guy at customer support and he wasn’t entirely sure and he consulted with someone else but in the end he was clear that when I authorise such payments I have no recourse whatsoever.
JCorre, thanks for the link. I did check it out but there is no protection for me there unless it is strictly a mistake by the bank. But there is not provision for recourse against a vendor who stiffed me.
I have a check card from my bank and have only had two issues. I had a triple charge which damn near cleaned me out. I called my bank and they put me through to the company that overcharged me. They appologized and I had the money back in my account the next day. I also had my card stolen one time. Even though it’s not a real credit card, I pay them $2.50 a month for insurance on it. They cleaned out around $2000 in my checking account. But, because of this insurance, I only had to pay $50 and the rest of the money was in my account in a couple of days. They immediately sent out a new card. So, yeah, I’ve had a couple of incidents, but I’ve found it worth it for convenience. Plus, I figure, if it had been a credit card that was stolen, I still think it’s $50. I don’t have any credit cards, and I’m too lazy to verify the $50 amount though.
I haven’t had any problems with Direct Deposit. I never have trusted compainies having their hands in my account.
True Story: My wife tried to get a cell phone for me via Bellsouth Mobility. They got her card number, took the deposit, then credit found out She owed them some money, and simply ran the original deposit through three times, then told her she didn’t qualify. So they stiffed her for $280.
We called the bank, they looked at it, and reversed all the charges. We got all the money back. Moral of the story? BS Mobility’s Collection Department is a bunch of fucking morons.
I’ve only used direct debit one time in my life. My auto loan was through the same bank with which I had a checking account, so I figured I would just let them do it, since it was all the same institution. There was no outside vendor to muck things up.
Things went just fine until it came time for me to move across the country. Naturally, I had to switch banks. I had a suspicion that the bank just wouldn’t be able to handle the simple process of stopping the direct debit on time (having dealt with them before on anything more complicated than a simple withdrawal had often elicited blank stares of confusion). I called them months ahead of time to tell them to stop the direct withdrawal and that I would begin sending checks in for the remainder of the balance. Well, they just couldn’t get it done, and the money kept coming out on the 15th as always. I must have called them every two weeks for four months, to no avail.
Finally, I said, “Listen, this account is going to be closed next week. There will be no money there. There will be no account there. I will be far, far away from here. Just give me the address to send a check to each month, and I will do that.”
And so I did. I don’t know how many times they tried to debit that closed account after I left. Because I anticipated their idiocy, I didn’t have any real problems. But if I were keeping that checking account and wanted the debiting stopped for any other reason, I would have been screwed.
The bank couldn’t even figure out what was going on within its own system!
Recourse on ACH debits pre-authorized by the consumer DOES NOT fall under Reg. E. “Auto debit” agreements are a contract between a merchant and a consumer. The financial institution is not a party to the contract. While Reg. E sets up some basic rules for auto debits, IT DOES NOT offer any protection or recourse, so long as a written autorization was obtained by the merchant. It is the intentional ambiguity in these agreements that gives unsavory merchants the ability to screw you over.
Direct deposit agreements do do indeed give the issuing company the right to automatically debit your account in case of an error. Again, the financial institution is not a party to the contract and recourse is through the check issuer. That said, I have never personally seen a problem caused by a company misusing this provision. I have heard stories (usually third hand) of problems and have no doubt that some are true, but they are exceedingly rare. Most companies handle payroll errors in the manner described by Fillet.
big girl says:
Here is one area where I disagree with Clark Howard (surprise, surprise). There is a risk associated with a debit card. If a mistake is made, or the card is lost/stolen and used fraudulently, it does affect your checking account. For those of us who are not rich, an episode like that could cause big (though temporary) financial pain. OTOH, the card has benefits that, in my opinion, equal or exceed the risk. Being on the inside of banking and having seen “the good, the bad, and the ugly” of debit cards has convinced me of that. Convenience is the biggie for me.
The key to debit card use is to treat the card like cash. Don’t purchase anything on your debit card that you would not purchase with cash. Protect your card like you protect your cash. Watch the merchant when they swipe your card - if they swipe more than once, ask why. Use common sense and you will likely be OK.
Debit card protections vary from bank to bank. My bank offers protections exactly like a credit card (except for charge back rights). You are liable for nothing if reported immediately, and a maximum of $50 in any fraud/unauthorized use case. My advice is shop around. If enough consumers demand better protection before they use a debit card, banks will offer it.
Your mother’s employer acted in a responsible and businesslike manner. Unfortunately, not every employer or merchant authorized for automatic withdrawals will do so.
I do appreciate the convenience of direct deposit, and I use it at my current job and don’t worry about it – I’m willing to trust my current employer, because in every instance I’ve seen where they had the opportunity to do the right thing or be jerks they’ve done the right thing. The opposite was true for my previous employer, which is why I made sure they couldn’t access my bank account for any reason.
Reg. E offers a mechanism for bank customers to dispute many types of transactions involving their accounts. Unfortunately, it only obligates the bank to investigate the transaction promptly and inform the customer of the results of their investigation, and does not cover situations where you’ve authorized someone to debit your account (e.g., the utility companies in the OP). If their investigation reveals an error on their part, there are requirements regarding how and when the funds will be credited to the customer’s account. If their investigation does not lead them to conclude that an error occurred, they simply notify you of that and the matter is essentially closed. While it’s still theoretically possible for you to extend the process and prove that the bank’s wrong, it’s not easy to do. I speak from personal experience: I noticed two withdrawals, each of $100, from the same ATM, exactly four hours apart. I’d defintely made the first one, but I definitely did not make the second. I filed a Reg. E dispute with the bank, which investigated and said “you did so”. The extent of their investigation, so far as I could tell, consisted of reviewing the transaction log for the machine in question. Now, I can’t dispute that there were two substantially identical log entries four hours (to the second) apart, but the bank and I differ on whether that’s sufficient proof that I did in fact perform the second transaction and receive the funds allegedly disbursed. After some preliminary work on determining what would be involved in continuing the dispute, I decided that it would cost me far more in time and effort than the $100 and let it drop.
The only time the financial institution is obligated to credit funds back to your account while the matter is still in dispute is when they are unable to complete their investigation in the ten day period following your dispute. In that event, subject to some limitations, the bank has to credit back the funds pending the outcome of the investigation, and (in about the only instance of anything resembling protection for the customer in Reg. E) should the bank determine that no error was made, the funds may again be debited, with the provision however that no items may be returned for insufficient funds for five days after the funds are debited, if they would have cleared had the debit not occurred.