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I have a question about disputes and their effect on funds. My question is if someone files a dispute with a payment they made to me, does that automatically mean the funds from the disputed payment are removed from my account, even before the dispute is resolved either way?
If funds are deducted from my account, does that mean any negative balance it creates will cause money to be taken from the bank account associated with PayPal?
Yes, once a dispute is opened, the amount in question will be deducted from your PayPal balance and held pending outcome of dispute.
If that leaves your PayPal balance in the negative, then you must add money via bank account to zero out the negative balance. If you happen to win the case, then the funds will be released back into your PayPal balance for you to withdraw or spend as you will.
This was a better explanation but PayPal removed it from the US Help Faqs but still available for Hong Kong PayPal:
How do I resolve a negative balance in my PayPal account?
Your PayPal account balance could become negative if your transaction is reversed for any reason, such as a chargeback or a lost claim, and there aren’t enough funds in your account to cover for the amount.
In such cases, you must reimburse PayPal for the amount of the reversed transaction, plus any associated fees incurred by PayPal. Please resolve your negative account balance as soon as possible. If the negative balance isn’t resolved within 120 days, your account may be locked and you won’t be able to log in to your PayPal account.
To resolve a negative balance, you can add funds to your account following the steps below: