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Right of Offset Explained
My bank today withdrew from my savings and checking account (both funded with social security monies) to pay off another account, using the term "right of offset". They gave no warning that this action was being taken. Now I am looking at bank charges, because I have three automatic debit payments coming due that these monies would have covered. Can they do this? What can I do?
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 The "right of offset" is a combination of state statutory and common law that allows a creditor to use money that it owes to a debtor to pay past due or defaulted obligations of the debtor to itself. Your bank owed you money in the form of your positive account balances. Let's say that the total positive balances came to $5,000. At the same time, one of your accounts with the bank was overdrawn, and with fees, this amounted to $2,500.
In order for offset to be available to a bank or other creditor, a creditor on one account has to be the same person as the debtor on the other account. That is, a bank would not legally be able to offset money from your personal accounts to pay a loan taken out by your corporate business, unless you were personally a co-signer or guarantor on that loan, but there could be an offset between accounts if they have an owner in common. For example if one account is owned by "A" and another account is owned jointly by "A" and "Z," a bank could collect from the joint account, money to cover an overdraft in the account owned only by "A".
The bank normally tries to contact overdrawn customers to get them to deposit enough to cover their overdrafts. You haven't said whether your bank took that step.
At some point, the bank decides it isn't going to get a deposit from you, so it transfers funds from your positive balances to cover the negative (overdrawn) one. That's offset. The net balances - positive balances minus the overdraft balance - don't change; you have the same amount of money (net), but in different accounts. You started with $2,500 net due you ($5,000 less the overdraft of $2,500). You finished with $2,500 net due you ($2,500 less an overdraft of $0).
Some states have laws that impose restrictions or conditions on a bank's ability to offset balances. For example, Massachusetts requires that a bank notify the customer by certified mail that an offset has been exercised, and prohibits offsets to pay consumer loans unless a notice about the potential for offset is included in the disclosures for those loans. Also, there are federal laws prohibiting the use of offsets to pay credit card account balances.
There have been a number of federal legal decisions handed down in the last few years that address the question of whether funds from Social Security and similar payments can be offset to pay obligations to a bank. While court-supervised legal action, such as attachments, levies, garnishments, etc., are not supposed to reach such funds, offsets by creditors are permitted under federal law. Whether the laws of your state have special provisions addressing offset procedures or restrictions on access to federal entitlement payments, is not known. To find out if you have any recourse against the bank, you will have to contact an attorney.
Published on BankingQuestions.com 9/16/08
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