Bank Setoffs

A "bank setoff" happens when a financial institution like a bank, savings and loan, or credit union removes money from a deposit account (like a checking, savings, certificate of deposit, or money market account) to cover a payment you missed on a loan owed to that institution.

The law imposes few limitations on bank setoffs. Though, most courts have decided that banks can't use setoffs to:

• take income that is otherwise exempt under state or federal law or
• cover missed consumer credit card payments unless you authorized the bank to pay your credit card bill by automatic withdrawals from your account.

Also, some state laws limit setoffs.

Limitations on Bank Setoffs

Most courts have said that banks can't use setoffs to take income that is otherwise exempt under state or federal law, like Social Security benefits, unemployment compensation, public assistance, or disability benefits. But the bank can set off exempt money in our account to cover fees you owe from the same account, like overdraft fees. So, if you owe fees on one account, open a separate account and have future exempt funds sent to that account.

In addition, financial institutions can't take money out of your account to cover missed consumer credit card payments, unless you previously authorized the bank to pay your credit card bill by automatic withdrawals from your account. Be aware that most credit card contracts contain a provision that allows for a setoff if you fall behind on your account. (15 U.S.C. § 1666h, Regulation Z of the Truth in Lending Act, 12 C.F.R. § 226.12(d)).

Some states impose limits on bank setoffs, as well. For example, with limited exceptions, California prohibits state-chartered savings and loan setoffs if the aggregate balance of all your accounts with the financial institution is under $1,000. (California Financial Code § 6660(b)). And in Maryland, bank setoffs for debts for the purchase of consumer goods are prohibited unless you've explicitly authorized the setoff or a court has ordered one. (Maryland Commercial Law § 15-702).

Getting More Information

To research any limitations on bank setoffs in your state, visit Nolo's Laws & Legal Research Center.

To learn about other ways creditors (including banks) can collect from you, see Debt Collection: Repossession, Wage Garnishment, Property Levies, and More.