It often makes sense to turn to the same bank for multiple financial needs, including savings accounts, loans and lines of credit. But if you bank with your creditor, you might want to take extra precaution to eliminate the risk of default. The bank has the legal right to seize funds from your account if you default on a debt owed to the bank. The Fair Debt Collection Practices Act is designed to protect consumers from unfair and abusive debt collection activity, but it does not include bank offsets.
The Fair Debt Collections Practice Act regulates collection activity by third-party debt collectors. If you have a delinquent loan or bank account through the bank housing your personal accounts, the bank is the original creditor. Unlike most creditors, the bank has access to your funds without obtaining a court order. The bank can also take funds from your account to cover an overdrawn account within the same bank.
Right of Offset
Under the right of offset, banks have the legal authority to withdraw funds held in a your checking, savings, or investment account to pay a debt owed to them. Some examples include a delinquent auto loan, overdrawn checking account or past-due mortgage. Basically, the bank can help themselves to money in any of your accounts if you owe them money. If the bank includes the right to offset in the account terms and conditions you agree to when opening your account, they have your consent to offset when necessary. Unless specifically stated in the paperwork, the bank is not required to give you advance notice before an offset.
Liability and Account Ownership
For an offset to occur, you must be personally liable for debt and the bank account must be in your name. Even if the account is held jointly with someone not liable for the debt, the account is subject to offset. The bank cannot legally offset money in your personal bank account to cover a business debt, unless you were the guarantor or co-signer of the loan. Under the federal Social Security Act, Social Security benefits and Supplemental Security Income benefits are exempt from levy, attachment, garnishment, and other legal process, including a bank offset.
Although a bank cannot take money out of your account to repay an unrelated creditor, they can offset if you owe money to an affiliated bank. If your bank has a financial partnership with another bank you owe, you could be at risk of an offset. When a bank buys out another, the names do not always change. Even if you are unaware of the new relationship, you could face an offset if you bank with one and owe the other.
- Office of the Comptroller of Currency: Answers About the Right of Offset
- The Schreiber Law Firm: The Bank's Right of Offset and How it Affects You
- Bankers Online: Offsets Against Social Security Payments
- Bankrate.com: Lenders Can Tap Bank Account for Mortgage
- Federal Deposit Insurance Corporation: Consumer Protection - Debt Collection Practices
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.