I closed my account at a bank on 12/19/07 (And yes, this is shown on their online banking service on their website). On 1/16/08 my University had not received the billing statement from my host University (I'm studying abroad) so they refunded my money from scholarships and loans to this said bank. Now the bank accepted this deposit with the description Credit on Jan. 21, 2008 and did not notify me about the transaction. Again, the account is labeled as closed but they have accepted my money from the University. The customer service department lacked just that when I called and asked for them to wire my money to my new bank account or refund it to the University. They said they would do neither of those and I had to send a notarized letter (Bank=US Me=Europe) to their HQ and have it approved then after a few weeks I will receive a check by snail mail to a US residential address. All this sounds filled with bad practices but is this even allowed? Banks accept money on closed account?

They usually will not.