Generally, your checking account is safe from withdrawals by your bank without your permission. However, there is one significant exception. Under certain situations the bank can withdraw money from your checking account to pay a delinquent loan with the bank. The bank can take this action without notifying you. Also, under other conditions the bank can allow access to your checking account to other creditors you owe.
Bills.com reports that banks can invoke a special privilege called “right of offset” to take money from your checking account if you’re past due on an installment debt such as an automobile loan with the same bank. After you fail to make a payment on the loan, the bank simply debits your account for the amount due. The process is legal under federal law, but all banks may not choose to take the action.
Federal law prohibits federally chartered banks from using the right of offset to pay missed payments on revolving accounts such as credit cards. Generally, federally chartered banks are major banks, perhaps part of a nationwide chain. Examples of federally chartered banks in 2011 include Bank of America and Wells Fargo, according to Bills.com.
Banks usually exercise their right to offset when other collection efforts fail. The banks realize that taking money from a customer’s checking account without notice is a serious matter, and that it will likely highly upset the customer. However, some banks may decide they have no choice when the customer has a car loan with the bank that is days away from charge-off and repossession, yet the customer has money available in his checking account.
Banks allow access to checking accounts in another way, as well. They must comply with orders from a judge allowing a creditor or debt collector to garnish a debtor’s bank account for an unpaid debt. Garnishment is possible when a creditor or debt collector wins a lawsuit for an unpaid debt. Banks do not give customers advance notice about a pending garnishment. Debtors suffering from garnishment usually learn about it when they discover a negative balance in their account when checking the status online, or when checks start to bounce.
People with delinquent debts at a bank or credit union should resolve the issue or move all of their deposit accounts to another bank. This helps guard against unauthorized withdrawals under the right to offset, but may not serve as a defense against garnishment.
- The New York Times: Pay Garnishments Rise; John Collins Rudolf; April 2010
- Neighborhood Economic Development Advocacy Project: Frozen Bank Accounts
- Bankate; Can Creditor Garnish Bank Account?; Justin Harelik; February, 2008
- Bills.com: Right of Offset
- Bankrate.com: Is My Money Safe After Foreclosure?; Justin Harelik; November 2009