What is it called when banks take your money?

Right of Set-off: When Banks Take Your Money

Banks and other financial institutions have the legal right to utilize funds from one account to settle debts on another held by the same customer. This practice is known as the right of set-off or offset and allows banks to recover outstanding payments.

How Right of Set-off Works

When a customer has multiple accounts with the same bank, such as a checking account and a savings account, the bank has the authority to move funds from one account to another to cover unpaid debts. For instance, if a customer fails to make a payment on their credit card, the bank can transfer funds from their checking account to satisfy the debt.

Conditions for Right of Set-off

The right of set-off is not absolute and can only be exercised under certain conditions:

• Same Customer: The accounts involved must belong to the same customer.
• Similar Debt: The debt being offset must be related to the account from which the funds are being taken. For example, a bank cannot take funds from a checking account to cover a credit card debt not associated with that account.
• Demand for Payment: The bank must have made a reasonable demand for payment before exercising the right of set-off.

Limitations of Right of Set-off

There are some limitations to the right of set-off:

• Protected Accounts: Certain accounts, such as Social Security or pension accounts, are exempt from the right of set-off.
• Notice Required: In most cases, banks are required to provide advance notice to customers before exercising the right of set-off.
• Disputed Debts: If a customer disputes the validity of the debt, the bank cannot use the right of set-off to collect on it.

Consequences of Right of Set-off

The exercise of the right of set-off can have significant consequences for customers:

• Account Balance Depletion: Funds can be transferred from an account without the customer’s consent, leaving them with an insufficient balance.
• Overdraft Fees: If the transferred funds exceed the balance on the offset account, the customer may incur overdraft fees.
• Damage to Credit Score: Unpaid debts can negatively impact a customer’s credit score, which can affect their ability to access credit in the future.

Protecting Yourself from Right of Set-off

To minimize the risk of funds being taken without your consent, consider the following:

• Consolidate Accounts: Reduce the number of accounts you have with a particular bank to limit the potential for the right of set-off.
• Track Account Balances: Monitor your account balances regularly to ensure you have sufficient funds to cover potential debts.
• Dispute Invalid Debts: If you believe a debt is invalid, contact the bank immediately to dispute it.
• Consider Credit Unions: Credit unions are not-for-profit organizations that generally do not exercise the right of set-off as aggressively as banks.