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"Right of offset" might be a term most people are unfamiliar with, but it's something anyone who has an account with a bank or credit union should understand. The right of offset allows banks and credit unions to take money from your checking account, savings account or certificate of deposit (CD) to pay a debt on another account you have with that financial institution.
For instance, a bank might subtract money from your checking account to cover a missed payment on an auto loan if it also handles that account. And a financial institution might be able to exercise its right of offset without telling you ahead of time. This might seem unreasonable at first blush, but right of offset is perfectly legal as long as a bank or credit union follows the rules. Read on to learn more about how the right of offset affects you as a bank or credit union customer.
Right of Offset Defined
Generally, a bank or credit union can take your money from a deposit account, like a checking or savings account, to cover a separate debt you owe to the same bank or credit union if you've fallen behind on making payments. But that right doesn't necessarily extend to every type of debt. For example, a bank typically could use the right of offset to cover an overdue payment on a mortgage or auto loan but not to cover an overdue payment on a credit card.
Right of offset also is known as right of setoff.
When a financial institution transfers money under its right of offset, that action might lead to interest penalties on a CD, bounced checks or even a negative account balance.
When a Bank Might Exercise Right of Offset
Keep in mind that this language may differ from one institution to another. Credit unions often enjoy more leeway in exercising the right of offset than banks do. That could mean, for instance, that a credit union could seize your money to pay a credit card debt while it's normally illegal for banks to do that.
In some cases, this language might give a bank or credit union permission to take money not only from an individual account that's in your name only but also from a joint account that you have with someone else. If it's a joint account, the financial institution might withdraw money to cover a debt owed by any joint owner of the account.
A financial institution might even apply the right of offset to government payments deposited into your account, such as Social Security benefits.
The right of offset doesn't apply to tax-deferred retirement accounts like IRAs.
Your Rights as an Account Holder
If the documents you signed when you opened a checking account, savings account or CD included a right of offset agreement, then you've permitted the financial institution to take your money to pay a debt under the terms outlined in the agreement. The agreement is a legal contract and you're subject to it as long as you're an account holder.
In some cases, you might not even learn that your bank or credit union has exercised its right of offset until after the fact. The agreement doesn't, however, open the door for a financial institution to pull money from your account whenever it wants. For instance, federal law prohibits a federally chartered bank from using the right of offset to pay your overdue credit card bill.
State laws might also limit a bank's or credit union's right of offset. This is the case in California, where a financial institution can't push your balance below $1,000 when it pulls money from your account to cover a debt. Some states also prohibit draining government benefits like Social Security or unemployment in a right of offset action.
How to Respond to a Right of Offset
If a bank or credit union legally pulled money from your account to cover a debt, such as an overdue payment on an auto loan, then there's not much you can do.
But you can prevent further offsets by making sure you're up to date on paying the debt. Another way to avoid offsets: Move your checking account, savings account or CD to a different financial institution—one where a lender can't touch your money under a right of offset scenario.
If you think a bank or credit union has wrongly taken money from one of your accounts to cover a debt, you might consider consulting an attorney about your legal rights. You also might contact the federal Consumer Financial Protection Bureau, the Consumer Assistance Group within the U.S. Comptroller's Office or the consumer division of your state attorney general's office.
How to Work With Your Bank to Resolve the Issue
If you're unable to make a debt payment, contact your bank or credit union to see whether you can work out a repayment plan. The financial institution might be willing to come up with a plan if, say, you lost your job and have run into financial trouble.
The smartest approach is to be upfront with your financial institution rather than trying to avoid the issue.
The Bottom Line
Reading the deposit agreement you'll sign when opening an account is certainly not as enjoyable as reading a novel. Yet being familiar with the right of offset and other provisions spelled out in it could prevent you from losing money and losing your patience. It's best to thoroughly read and understand the agreement before you sign it. But if you've been hit with a right of offset action, be sure to carefully review your deposit agreement along with any notification you receive about that action.
Remember that if a bank or credit union has tapped your account under the right of offset, you have options. For instance, you can reach out to the financial institution for help with making your debt payments, or you can seek guidance from a state or federal agency that protects consumers' rights.