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Fighting the Bank's Right of Setoff

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What if you have money on deposit with a bank, and you owe the bank money for something totally unrelated―what can they do about it? Let's say a bank had given you a loan at one branch and you'd fallen a bit behind on your payments. Then let's also say you had money on deposit in a savings account, at another branch, but with the same bank? Can the bank just go into your account and take out what you owe them?

This scenario seems to prompt dueling intuitions; on the one hand, banks seem to be able to do whatever they want, and since they generally draft the contracts they sign with their clients, they definitely command the lion's share of bargaining power.  On the other hand, something about this power seems wrong, intrusive. Shouldn't the law protect us by giving us ultimate agency over our funds? Not paying a debt may be wrong, but it should still remain your choice to make, right?

Wrong or not, the bank would be acting legally in going into your accounts to take what you owe them because they have what is called a right of setoff. The bank has the right to "setoff" the debt owed to them with the funds held on deposit. The source for this right can usually be located in two places: first, in the contract you signed when you opened the deposit account; and second, under principles of common law. Essentially, the bank assumes the role of secured creditor when you make the deposit, even if the loan they originally extended to you was unsecured!

Thus, if you have money in any number of accounts, the bank can go rooting in there for a debt they claim you owe them. This includes checking accounts, savings accounts, money market accounts, and certificated of deposit (CDs). Generally speaking, the bank will do this for a debt owed them that is delinquent, where they have made a demand for payment from the debtor. However, the bank is not even required to give you advance notice that they are planning to setoff by deducting from your accounts. This can cause major trouble for you if you have outstanding checks, as the bank can take every penny in your account and then charge you overdraft fees when those outstanding checks finally clear.

Other complications can follow: Imagine that you've been waiting for your employer to direct deposit your paycheck, as with every pay period so you can pay your rent or make a payment on your car. If your bank decides to setoff, that money you were expecting will be gone before you even see it.

What if you unwittingly owe money to a bank who also happens to hold some of your money in deposit? Many people don't realize that the stores that extend them credit for purchases are actually a middleman; the real lender is a bank. In this case, the bank is allowed to seize your funds, even though you were unaware of the peril.

As you can see, setoff gives banks a powerful tool to use against you…as if they needed another one! So what can you do to fight back when your money is at risk?

Unfortunately, even declaring bankruptcy won't eliminate the bank's power in this situation. The bank's right of setoff supersedes the bankruptcy. That's why it's very important to change banks prior to filing bankruptcy, if you owe your bank money. Any money owed will then be discharged as a general unsecured debt through your bankruptcy. Speak with an experienced bankruptcy attorney to find out more. In North Carolina, contact the Law Offices of John T. Orcutt at 1-888-234-4181 to set up a free initial debt consultation. Or fill out our online debt questionnaire at www.billsbills.com.

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