What is the “Right of Offset”?
The “Right of Offset” gives a lending institution (i.e. Bank or Credit Union) a legal right to seize funds that a debtor may have in a deposit or asset account at that particular banking or financial institution, to cover a loan in default. It is also known as the “Right of Set-Off”.
What are the dangers of the “Right of Offset”?
If an individual, couple, or other entity has a checking, savings, or other form of deposit account at the same financial institution where they have a credit card, auto loan, mortgage, other debt account, that individual or entity has what can be considered a “banking conflict”. In other words, anytime an asset account is kept at the same banking institution as a liability account, a potential “banking conflict” occurs due to that banking institutions “Right of Offset”. What this means is, if an individual for whatever reason fails to make payments on a liability account, the financial institution has the legal right to not only freeze that individuals asset/deposit account, but to also seize any funds available to offset the debt due to that financial institution.
What types of liability accounts or debts does the “Right to Offset” pertain too?
A financial institutions freedom to utilize the “Right of Offset” is determined primarily by how they are chartered.
State chartered and regulated credit unions and banks, along with federal credit unions chartered and regulated by the National Credit Union Association (NCUA) have the freedom and authority to exercise their “Right of Offset” on both secured accounts or asset backed (i.e. mortgage loan, auto loan), and unsecured accounts (not backed by collateral) or open-ended revolving accounts (i.e. certain credit cards and credit extensions).
Federally chartered and regulated banks (i.e. Bank of America, Wachovia Bank, Wells Fargo) have the freedom and authority to exercise their “Right of Offset” on secured, but not unsecured accounts. A bank/financial institutions rights and authority as it pertains to its use of “Right to Offset” may vary between institutions. To find the specifics of a particular institution research the following areas:
- The institutions regulatory authority.
- The institutions member agreement received when establishing an account.
- The institutions loan/debt documents or agreements received when establishing a loan.
Who regulates state chartered and federally chartered banks and/or financial institutions?
State chartered banks and financial institutions are regulated by the particular state Department of Banking, Department of Financial Institutions, or Department of Finance from which the bank or financial institution conducts business.
Federal credit unions are regulated by The National Credit Union Association (NCUA).
Federally chartered National banks are regulated by The Office of the Comptroller of the Currency (OCC). The OCC is a bureau of the U.S. Department of the Treasury.
How can I protect my assets?
Never assume that it will not happen to you. The present difficulties present in the current economy have created unexpected lay-offs and job losses. Expensive medical emergencies happen every day. Take the following steps to protect yourself:
1) Separate your accounts. Keep your asset and deposit accounts with institutions that are in no way related or affiliated with financial institutions in which you have loans or debt obligations.
2) Monitor who owns your mortgage note. Mortgage notes are bought and sold everyday on the secondary market. Make sure a financial institution in which you keep your asset or deposit accounts does not purchase your mortgage note. If this does happen, move your assets immediately to another institution.
3) Do not keep your investment account at institutions where you have debt. A bank or financial institution will attempt to collect their money by any means possible. They have teams of attorneys on retainer that constantly look for new ways to collect. As with any regulation there are always “loop holes”. Do not put yourself in a position to be the example.
In closing, do your best to pay your bills on time. The “Right and Righteous” folks out there that will say that you just need to honor your debts and pay your bills on time. These are the same folks who scream the loudest when they find themselves in an unexpected financial hardship, and find that a financial institution has “offset” their account leaving them no money for food or gas. There are no absolutes in life, so plan accordingly. A few proactive adjustments in how you handle your banking now can save you a lot of possible future hardship.
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