Updated November 10, 2020:

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.

Banks and the Right to Offset

A bank will not be able to withdraw funds from your account unless the following stipulations apply:

  • 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.

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.

Beware that some banks include a clause in their contracts stating money can be moved between any account that has your name on it. This would rule out many of the terms and 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.

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.

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