You can give your bank permission to transfer funds from your deposit account to pay a debt. However, in some circumstances your bank can deduct money from your deposit accounts to settle your unpaid debts without having to obtain your consent. State banking laws vary and depending on the rules in your state, your bank may or may not have to notify you about the transfer of funds.
Offset
When you deposit money into a bank account you become a creditor of the bank. If you then borrow money from your bank, you also become a debtor of the bank. If you fail to repay your loan, your bank can collect payment on that debt by deducting money from your deposit account. In this situation, your bank exercises the right of offset to settle one debt by offsetting it with another debt that involves the same parties.
Overdrawn Accounts
The right of offset pertains to creditor and debtor relationships. But a bank can also use the right of offset when you overdraw your deposit account. If your checking account balance drops below zero, your bank lends you money to cover your overage. Therefore, when you overdraw your account you enter into a credit relationship with your bank. If you do not deposit money into your bank account to settle the debt, your bank can use the right of offset to collect the money you owe.
Limitations
Federal law prohibits banks from using the right of offset to collect money owed on unpaid credit cards. Banks can take you to court for unpaid credit card debt and ask a judge to garnish your account, but your bank cannot simply debit your deposit account whenever you fail to make your payment. In addition, some states, such as Massachusetts, do not allow banks to use the right of offset to collect payment on an overdue loan unless the loan contract specifically allows for such a transaction to take place.
Other Considerations
When banks use the right of offset, the ownership of the debt does not have to exactly match the ownership of the deposit account. If you overdraw a single ownership bank account, your bank can offset that overdraft with money from a joint account that you own even if the other account owner has no connection to the overdrawn account. However, unless you sign as the guarantor of a business loan, a bank cannot take money from your personal accounts to settle debts related to your business.
