The term "right of offset" may be unfamiliar to you. Still, if you have an account with a bank or credit union, you probably gave your financial institution permission to exercise the right of setoff.
Image source: Getty Images.
What is the right of offset?
Right of offset, sometimes called "right of setoff," gives your bank or credit union the right to take money from a deposit account -- like a checking or savings account -- if you fall behind on making payments. However, the debt must be owed to your financial institution.
Here's an example: Imagine you own the home you live in and an investment property you use as a rental property. You took out a mortgage from another bank to purchase the rental property. However, you borrowed the money to purchase "your" home from the financial institution where you keep checking, savings, and money market accounts (MMAs).
Finances get tight, and you're unable to pay the mortgage on either property. Under the right of offset agreement, your bank can withdraw the funds needed to cover the payment on your primary loan (since you borrowed the money from that bank). However, it can't take enough out to cover the payment to the other bank.
Right of offset only applies to money you owe to your home bank, the financial institution where you have other accounts. If the bank that holds the mortgage on the rental property wants its money, it may take you to court or even begin foreclosure proceedings, but it can't ask your home bank to withdraw the money from your account.
Does not apply to all loan types
While your bank has the right to recover funds you owe for debts like a mortgage or auto loan, the right of offset does not extend to all loan types. Thanks to the Federal Truth in Lending Act, banks are prohibited from withdrawing money from your account to pay a credit card debt, even if you took that credit card out with the bank. The same rule does not necessarily apply to credit unions.
Where you live matters
Once you sign a document agreeing to the right of offset, you haven't opened the door to allow the bank to withdraw money whenever it wants. Remember, it can only be used to catch up on payments owed to that financial institution and is only applicable for specific types of debt, such as mortgages, auto loans, and personal loans.
State laws can also limit a financial institution's right of offset. For example, in California, a bank or credit union can't pull so much money from your account that the balance falls below $1,000. Some states also prohibit financial institutions from withdrawing funds from government benefits, such as Social Security or unemployment benefits.
Your best bet is to ensure you understand what you're agreeing to before signing a deposit agreement. If you have any questions, a bank or credit union representative should be happy to help you find answers.
