Bank Setoffs

If you miss payments on a bank loan, beware. The bank could take money from another account to cover the payments.

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

Limits on Bank Setoffs

There are a few limitations on bank setoffs. For instance, most courts have said that banks cannot 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. If you owe fees on one account, open a separate account and have future exempt funds sent to that account.

In addition, financial institutions cannot 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 term 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, all bank setoffs for debts for the purchase of consumer goods are prohibited unless you have 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.

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