With overdue Bank of America credit cards, my client worried that her new deposit at B of A would be seized by the bank to pay the cards.
After all, the bank would have possession of the commission check and a common law right to set off the deposit against the credit card debt.
Not to worry. There’s a federal law that protects bank accounts from credit card debt.
Credit cards can not offset
Federal Truth in Lending regulations explicitly prohibit a bank who is a card issuer from appropriating your deposit account to pay your debt on a card it issued.
(d)Offsets by card issuer prohibited.
(1) A card issuer may not take any action, either before or after termination of credit card privileges, to offset a cardholder‘s indebtedness arising from a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer.
Nor does it keep the bank from depleting your account if you’ve agreed to pay the card automatically by electronic transfer.
Credit cards exception to common law rule
Offset, or setoff, (they seem to be interchangeable terms) means to net out what one party owes another against a debt that runs in the other direction.
Merriam Webster defines it this way:
the reduction or discharge of a debt or claim by setting against it a distinct claim in favor of the debtor or party who is the object of the first claim (as in a lawsuit)
This principle is a mainstay of common law.
So, the Truth in Lending provision creates a statutory exception.
Bankruptcy discharge prohibits set off
At the end of a bankruptcy case, the provisions of the bankruptcy discharge prohibit a creditor from offsetting a pre bankruptcy debt against money the creditor owes you.
(a)A discharge in a case under this title—
(2) operates as an injunction against the commencement or continuation of an action, the employment of process, or an act, to collect, recover or offset any such debt as a personal liability of the debtor, whether or not discharge of such debt is waived;
So, if you discharged a personal loan from Bank of America, say, the bank cannot take your post bankruptcy deposits into your account to pay for the discharged debt.
With federal law in mind, my client was able to deposit her check into her bank account, secure in knowing the bank couldn’t apply the money she needed to live on next week to pay overdue bank-issued cards.
And her bankruptcy case will wipe out the credit card debt altogether.