Overdraft debt is treated by banks as an unsecured debt, similar to a credit card or personal loan. If you cannot repay it, the bank has options — but so do you.
For a general guide on borrowing and overdraft charges, see the Loans and Borrowing hub.
What Happens If You Cannot Repay Your Overdraft
| Stage | What happens |
|---|---|
| Ongoing overdraft use | Bank may charge interest (post-FCA rules: one single annual interest rate applies) |
| Exceeding overdraft limit | Bank may refuse payment, charge fees, or reduce your limit |
| Account in persistent arrears | Bank flags account; may reduce or remove overdraft facility |
| Formal overdraft default | Default notice issued; debt reported to credit reference agencies |
| Account passed to recovery | Internal recovery team contacts you; repayment plan discussions |
| Debt sold | If internal recovery fails, debt may be sold to a collection agency |
Since January 2020, the FCA required banks to charge a single annual interest rate on overdrafts (replacing the previous complex fee structures). This means comparing overdraft costs across banks became easier, and the overall cost of persistent overdraft use is more transparent.
Your Options If You Cannot Repay
1. Contact Your Bank’s Financial Difficulty Team
Most banks have a dedicated team for customers struggling financially. They can:
- Set up a structured overdraft repayment plan
- Temporarily reduce or freeze interest
- Avoid immediate default registration if you engage proactively
Do this first. Banks have a duty under the FCA’s Consumer Duty to offer fair treatment to customers in financial difficulty.
2. Arrange a Debt Management Plan
If you have multiple debts (not just the overdraft), a DMP through StepChange or another free charity can consolidate payments and negotiate with your bank. The overdraft is included as an unsecured debt.
3. Switch to a Basic Bank Account
If your bank closes your account due to overdraft issues, you are legally entitled to a basic bank account (no overdraft facility) with another bank. This ensures you can still receive income and pay bills.
Banks covered by the Basic Bank Account rules (the nine largest current account providers) must offer these — and cannot decline you on the basis of a poor credit history.
4. Formal Debt Solutions
If overdraft debt is part of a larger unmanageable debt situation:
→ Debt Solutions hub — IVA, DRO, DMP, bankruptcy
Overdraft Charges — Understanding Your Bill
Since January 2020, arranged overdraft rates are a single annual percentage rate (APR) per bank. Unarranged overdraft fees are effectively banned — banks cannot charge daily or monthly fees for going over your limit.
→ Overdraft Charges UK — Arranged vs Unarranged Fees
Right of Set-Off — Protecting Your Money
Banks have a legal right called the “right of set-off” — they can use money in your savings or current accounts at the same bank to repay an overdue overdraft without asking your permission. This is legal and the bank does not need a court order.
How to protect yourself: Keep any savings at a different bank from your overdrawn current account. If you have a savings account at Barclays and an overdrawn Barclays current account, Barclays can sweep your savings to clear the overdraft balance. If your savings are at a separate institution, they are protected.
This is particularly important if you are waiting for a salary payment, benefits payment, or tax credit. If those are paid into the same overdrawn account, the bank can retain the funds to reduce the overdraft instead of making the money available to you for food and bills. Consider opening a basic bank account at a separate bank and redirecting income there while you manage the overdraft situation.
What a Basic Bank Account Gets You
If your bank closes your current account due to an unrepaid overdraft, or if you need to bank elsewhere while managing the overdraft, a basic bank account is the solution. Key points:
- The nine largest UK banks are legally required to offer basic bank accounts to anyone resident in the UK — they cannot decline purely on credit history grounds
- Basic bank accounts have no overdraft facility — you cannot spend more than is in the account. This removes the risk of further debt accumulation
- They come with a debit card, and can receive direct credits (wages, benefits, BACS payments)
- You can set up direct debits from a basic bank account, allowing you to pay priority bills (rent, utilities, council tax)
- They do not appear any differently on your credit file to a standard account — having a basic bank account does not indicate to other lenders that you have had financial difficulty
Banks that must offer basic accounts include Barclays, HSBC, Lloyds, Halifax, NatWest, RBS, Santander, TSB, and Virgin Money. Contact any of these directly and state you want to open a basic bank account.
Negotiating With Debt Collectors Once an Overdraft Is Sold
If your bank sells the overdraft debt to a collection agency, you still have the right to negotiate:
- Request a full written breakdown of the debt — including the original overdraft balance and any fees or charges added since default
- Make a settlement offer — collectors often purchase debts at a discount and may accept a “full and final settlement” for less than the total owed. Offers of 50–70% of the balance are sometimes accepted, depending on how long the debt has been outstanding
- Confirm everything in writing — before paying any settlement, get written confirmation that the payment will be accepted as “full and final settlement” and that the remainder will be written off and the account marked as “partially satisfied” (or “satisfied” if they agree to a full mark-off)
- Avoid phoning — conduct all negotiations in writing (email or recorded post) to create a paper trail
When to Get Free Debt Advice
If an overdrawn balance is part of a larger picture of debt — credit cards, loans, BNPL arrears — do not try to manage it in isolation. Free debt charities can review your whole situation and recommend the most appropriate solution:
- StepChange Debt Charity: 0800 138 1111 or stepchange.org — online debt advice tool available 24/7
- National Debtline: 0808 808 4000 — specialist telephone debt advice
- Citizens Advice: citizensadvice.org.uk — local and online advice
If your total unsecured debt (including the overdraft) is under £30,000 and you have some disposable income, a Debt Management Plan via a free charity is usually the most appropriate next step. If you have no income or assets, a Debt Relief Order (DRO) may be more suitable — Citizens Advice or StepChange can advise on eligibility.