Your bank may be entitled by common law to setoff what it owes you from what you owe it on the garden variety debt.
But the federal Fair Credit Billing Act forbids a bank who has issued you a credit card from helping itself to your funds at the bank to pay the credit card.
How bank accounts work
When you deposit money at your bank or credit union, the bank doesn’t really tuck your money away in the vault til you need it.
It makes an entry in its books that it owes you the money.
The deposit creates a debt from the bank to you, the depositor.
When debts run both ways
If you borrow money from the bank on a HELOC or personal loan, you now owe the bank a debt.
Common law allows the off set (or setoff) of one debt against the other, when the parties owe each other.
If you don’t make the payment on your debt to the bank, the bank can reduce the debt it owes you by the delinquent payment.
That’s a setoff.
Credit card debt can’t be setoff
Federal law, enacted 40 years ago, bars banks from treating your credit card debt on the bank’s card the same way a conventional loan is treated.
With a couple of narrow exceptions, setoff is prohibited if your debt to the bank or credit union is a credit card.
Neither can the depository freeze the money in your account because of a credit card balance.
Setoff rights prompt change of bank
Because of common law or contractual rights of setoff, we instruct our clients filing bankruptcy to open new bank accounts with institutions with whom they have no history.
Before a bankruptcy case gets filed, banks retain the right to help themselves to your checking account if you are behind on other debts to the bank.
While that right ends when a bankruptcy case is filed by reason of the automatic stay, setoff sometimes happens before the bank gets notice of the bankruptcy. Or, the bank simply screws up and sets off funds.
The time and hassle of getting a wrongful setoff unwound is significant. And if the setoff occurs before the bankruptcy is filed, it’s lawful and the amount in question is often too small to warrant a preference action.
Setoff of credit card debt never OK
The protections of the Fair Credit Billing Act against offset of credit card debt applies to all consumers, in or out of bankruptcy.
For a 40 year old law, however, it seems woefully unknown.
Now you know, and can insist on your right to keep your bank from picking your pocket over plastic.
Image courtesy of Steven Depolo.