Key Takeaways

  • Definition: The right to offset allows creditors, especially banks, to deduct funds from a debtor’s account to cover unpaid obligations.
  • Historical Context: Originating in Roman times and later evolving through English common law and U.S. legal systems, the right to offset has long been a financial and legal principle.
  • Banking Applications: Banks can only use the right to offset when the debt and the account belong to the same person and the same bank, and when the debt is past due.
  • Impact on Joint Accounts: Banks generally cannot withdraw funds from a joint account to cover an individual’s debt unless explicitly stated in the agreement.
  • Legal Protections: Some laws limit a bank’s ability to use this clause, particularly in cases involving government benefits, consumer protections, and financial hardship.
  • How to Avoid It: Staying proactive with payments, communicating with banks, and seeking legal guidance can prevent unexpected fund withdrawals.
  • Alternatives & Consumer Rights: There are legal measures to dispute or mitigate the right to offset, including exemptions for certain types of income and protections against unfair bank practices.

A right to offset clause allows parties to offset or cancel mutual debts owed to one another by citing the amounts owed, subtracting one debt from another, and paying off the balance.

For example, if you have any debt with a bank, in certain cases, it may take the existing funds in one of your accounts to settle the missed payments on another account. This would fall under the bank's "right to offset."

If you're ever behind on loan payments or credit card payments, there's a chance the bank can withdraw funds from one of your accounts to settle the debt.

History of the Right to Offset

The first instances of right to offset were seen in Roman times. It was a device used in proceedings to prevent parties from having to repay a debt when they still had the right to claim a debt owed to them.

The right to offset was also seen in 17th-century common English law. Later, they began to apply the same principle to bankruptcy and equity cases. In those times, the right to offset wasn't usually permitted in contracts arising out of torts. However, that may not be the case today.

The right to offset was also seen in early U.S. cases when it was applied to bankruptcy or cases involving liquidation. Today, you'll see the right to offset mostly being applied to bankruptcy cases or insurance insolvency cases. However, it still applies to other contractual relationships as well.

In essence, the right to offset was established in the courts to settle competing obligations. It tries to prevent John from paying Mary when Mary owes John. What started as a basic principle of fairness has become a legal right prevalent in many different types of contracts.

Legal Evolution and Modern Applications

The right to offset has evolved significantly, particularly in bankruptcy and insolvency laws. Today, it is often seen in financial agreements, including lending contracts and commercial transactions. Courts have recognized its legitimacy in settling debts but have also placed consumer protections in certain cases. Various jurisdictions have specific regulations that limit how and when the right to offset can be exercised, particularly when public policy concerns, such as pension benefits or government assistance, are involved​

Banks and the Right to Offset

A bank can only withdraw funds from your account under the following conditions:

  • The account in debt and the other account are both in your name. This instance becomes more difficult to prosecute when joint accounts are involved.
  • The account in debt and the other account are from the same lender. One bank cannot withdraw funds from your account to settle a debt with a different bank.
  • The debt is in arrears. A bank will not be able to withdraw funds with the right to offset if the repayments are current and up to date.
  • The debtor has given you advanced notice of his or her intent to use the right to offset to cover your arrears.
  • The debtor has considered your individual circumstances and whether these actions will cause you hardship.

In reality, a bank will rarely exercise its right to offset. However, if you ever run into this, the bank is required to call you to explain how to avoid this in future circumstances.

Exemptions and Legal Limitations on Bank Offsets

Although banks have the right to offset debts, several legal exemptions protect account holders from indiscriminate fund withdrawals. Some common exemptions include:

  • Social Security Benefits: Federal law protects Social Security payments from being automatically withdrawn by banks.
  • Veterans Benefits & Disability Payments: Certain government-provided funds are protected against automatic offset actions.
  • State Laws on Consumer Protection: Some states impose additional restrictions, requiring banks to notify customers before withdrawing funds.
  • Hardship Considerations: If an offset would cause significant financial hardship, consumers may have legal grounds to dispute the withdrawal​.

Banks are also required in some cases to notify customers before applying the right to offset. Reviewing account agreements and banking policies can help account holders understand their exposure to this risk.

Joint Bank Accounts

The right to offset isn't always permitted with joint bank accounts. It can't be used in the following instances:

  • To transfer funds from your joint bank account to settle a debt only in your name.
  • To transfer funds from your sole bank account to a debt you've entered into with another party.
  • To transfer funds from your joint bank account to a debt you've entered into with another party.
  • To transfer funds from your joint account with one party to settle a debt you've entered into with another party.

Some banks include clauses in their contracts allowing the transfer of funds between any accounts associated with your name, potentially overriding the conditions outlined above. However, it's important to note that this could be considered an unfair term. If you ever come across an instance where your bank is removing funds from a joint account to cover a sole debt, it's time to see what you agreed to in writing and make a complaint.

Special Considerations for Business Accounts and Partnerships

Business owners with joint accounts should be aware that outstanding debts of one partner could trigger the right to offset, jeopardizing shared funds. If one partner has outstanding debts, the bank may attempt to withdraw funds from the shared business account. To mitigate this risk, business owners should:

  • Clearly define financial responsibilities in operating agreements.
  • Open separate accounts for personal and business transactions.
  • Regularly monitor account agreements to understand offset risks​.

Additionally, individuals in partnerships should review banking terms to ensure they are not unknowingly liable for another party’s debts.

How to Avoid the Right to Offset

As soon as you realize you may fall behind on any of your debts, contact someone at your bank immediately. Explain your financial difficulties and see what they can offer to help. Perhaps they can offer a separate overdraft from another one of your accounts or reduce your overdraft fees to something more affordable.

Steps to Protect Your Funds

To safeguard your accounts from potential offsets, consider the following strategies:

  1. Banking at Separate Institutions: Keeping checking and loan accounts at different banks reduces the likelihood of automatic offsets.
  2. Negotiating Debt Repayment Plans: If struggling with debt, communicate with lenders to arrange manageable repayment plans before an offset occurs.
  3. Understanding Your Bank’s Terms: Reviewing the fine print in banking agreements helps consumers identify any hidden offset clauses.
  4. Challenging an Offset Legally: If an offset occurs unfairly, seeking legal help can provide recourse for reversal or exemptions​.

If you need legal guidance on challenging an offset, UpCounsel connects individuals with experienced attorneys who specialize in financial disputes.

Frequently Asked Questions

1. Can a bank take my Social Security check to pay off my debt?

No, federal law protects Social Security payments from being used for the right to offset, except under specific circumstances such as child support obligations.

2. Does the right to offset apply to credit unions?

Yes, credit unions may also exercise the right to offset, but they often have different policies and member agreements that may affect how it is applied.

3. How can I dispute a bank offset?

You can challenge an offset by contacting the bank, reviewing account agreements, and consulting a legal professional if necessary. Some offsets may be reversed if they violate consumer protection laws.

4. Are all joint account funds at risk for offset?

Generally, banks cannot use funds from a joint account to cover an individual’s debt unless all account holders consented to such an agreement. However, some financial institutions include offset clauses in joint account agreements.

5. What happens if my account balance isn’t enough to cover the offset?

If your account balance is insufficient, the bank may attempt to offset future deposits. Some banks also impose overdraft fees, worsening the financial strain.

If you need help with a right to offset clause, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.