A bank can take your money for an existing debt, but only under certain circumstances. If you owe money to the same bank where you have other accounts, the bank can legally take money out of those accounts through something called the “right of offset.” However, there are ways to prevent this from happening as well as ways to mitigate the consequences if it does.
You might be aware that if you are involved in criminal activities, the federal government can order a bank or credit union to freeze or seize your assets in order to recoup money. Most law-abiding people will never have to worry about this type of seizure. But if you have outstanding debts or missed loan payments, you should be concerned with your bank taking money directly from one of your accounts to pay what you owe.
Can a bank legally do this? The answer is yes, but with some restrictions. Banks have the ability to take money they are owed for loans, such as car loans, mortgages, or personal loans, using the right of offset. Keep reading to learn how this process works and some easy ways to prevent this type of withdrawal.
How can a bank legally take my money?
A bank can only legally take your money if you have multiple accounts with the same bank or credit union to whom you owe money. If, for example, you have a mortgage with Wells Fargo in addition to a Wells Fargo checking and savings account, you could be subject to the bank’s right of offset. If you are delinquent or default on your mortgage, then Wells Fargo has the legal power to recoup the money from your existing accounts.
Right of offset
The right of offset, also known as the right of setoff, allows banks to take money out of your checking account, savings account, or CD to pay off an outstanding debt with that bank. When you open up a new account with a bank or other financial institution, there will typically be right-of-offset language in the agreement you sign.
The right of offset can even be applied to government payments, such as Social Security and disability payments derived from Social Security. However, there are certain payments where the right of offset cannot be applied. If you have government-sponsored tax-deferred accounts, such as an IRA, the right of offset does not apply. Those accounts will not be hit, even if you have delinquent loans at the same bank.
Banks can apply the right of offset to take money:
- From a sole bank account in your name to debt in your name only
- From a sole bank account in your name to a debt you have jointly with another person
- From your joint bank account to a jointly shared debt, as long as the same two people are named on each
If you have a joint account with another person, money can be taken from that account as well, but only in certain circumstances. In many cases, the language in the right-of-offset clauses in your contract will allow money to be taken from your individual accounts and joint accounts.
For instance, say you bank at Wells Fargo and you and your husband have perfect credit and banking practices. Your husband has a brother, who is always in a perpetual state of trying to get his act together. If only your husband signs as a guarantor on his brother’s mortgage, which was also from Wells Fargo, then Wells Fargo does not have the right to take money from the joint account. However, if both your names are listed as guarantors, then the bank has the right to take money out of your joint account to pay off the mortgage debts.
If you are thinking about opening an account switching banks, you can use our comparison tool to find the right checking account for you.
How to prevent money from being taken for unpaid debts
Of course, you want to avoid having money pulled from your account. Here are some ways to protect yourself.
Use different banks
The easiest way to prevent a bank from taking your money is to diversify your risk by diversifying your banking. If possible, don’t take out loans with your everyday bank. Instead, keep your checking and savings accounts and CDs at your preferred bank and borrow through another bank or lender. The loan terms might not be as good at the second bank, but you can eliminate the risk of your money being taken.
Manage and prioritize your finances better
The first rule of thumb in managing your finances is to pay off your debts on time. If something happens and this is not doable, then prioritize the debt payments you have with the bank where you keep your money. Remember, a bank only has the ability to enact the right of offset on loans issued with that bank. Use as much of the new money you earn as you can to pay the high-priority debts.
Don’t guarantee other people’s debts
The less you guarantee other people’s debts, the less liability you have. As a rule of thumb, don’t lend money or guarantee loans for people who you don’t trust to pay them back in full. Even if these people claim to have gotten their acts together, you will still be on the hook if the loan you guarantee is from the same bank.
What can I do if my money has already been taken?
Don’t panic. You still have some options.
Call the bank
The first order of business is to call the bank and ask why the money was taken from your account. Sometimes, a simple misunderstanding or miscalculation can be the reason the bank utilized its right of offset to take your money.
Or, if you do owe money but have been a reliable client, the bank might offer you a grace period to pay off the debts before they automatically take your money.
File a complaint
Different agencies, such as the Consumer Financial Protection Bureau and the Office of the Comptroller of the Currency, regulate banks and credit unions. If you feel your money was withdrawn improperly, you can determine which agency regulates your bank and file a claim with that agency. The FDIC has a search tool where you can look up who regulates your bank.
Go to court
If a bank took your money but you feel it was unwarranted, and all else fails, you can take the bank to court. Be forewarned that banks typically have watertight contracts and an army of lawyers at their disposal. Going to court should be considered an option of absolute last resort.
Can a bank take your money without your permission?
According to federal law, a bank can take money out of your account without first asking for permission if you have an unpaid debt with the same bank. Your deposit account agreement or loan agreement should contain an explanation of when the bank may exercise its right of offset. Be sure to read it carefully.
Can a bank seize your money?
Yes, for the reason stated above. A bank can also seize your money if the money is related to a crime. Suppose your bank account has been involved in business associated with Colombian drug cartels, ISIS, or a pyramid scheme. In that case, the bank can freeze your assets, and money can be taken from your account. However, in these cases, the bank gives the money to the government.
Can the bank steal your money?
No, a bank cannot steal your money. They need to have a legitimate reason, such as an unpaid loan.
Can banks take your money in a depression?
The majority of banks are FDIC insured, so as long as your bank is one of them, your deposits are protected, even during an economic depression. There are limits, though ($250,000 for an account with a single owner), and the insurance does not cover stocks, bonds, or safe deposit boxes.
Who can take money out of a bank account?
Other than yourself and your joint account holder, only the bank and the U.S. government can take money and only under certain circumstances.
- Banks can only take money from you for unpaid debts if you hold accounts with the same bank.
- The process of taking money out of an account to pay existing debts is called the right of offset.
- There are easy ways to prevent a right-of-offset scenario from happening, such as managing your finances properly and getting a loan from a different bank.
- If your money has been taken through a bank’s right of offset, you should call the bank to resolve the issue. If you believe the money was taken in error, you can file a claim, or, in a worst-case scenario, you can take the bank to court.