Right of Offset (Setoff)Credit Repair Definition
A lender's legal right to seize funds from a borrower's deposit account to cover a defaulted debt owed to the same institution.
Definition
The right of offset, also known as the right of setoff, is a common law and contractual right that allows a depository institution (like a bank or credit union) to seize funds held in a debtor's deposit account (checking, savings) at that institution to satisfy a mature debt owed by the debtor to the same institution, such as a defaulted loan or credit card balance. Essentially, the bank uses the money the debtor has on deposit to pay itself back for the debt owed to it. This right is typically outlined in the account agreements signed when opening the account. However, the right of offset is subject to limitations; for example, federal regulations generally protect directly deposited federal benefits (like Social Security) from offset for private debts, and state laws may provide other restrictions.
Frequently Asked Questions
Can a bank use offset for any debt I owe them?
Generally, the debt must be mature (due and payable) and the funds must be in a general deposit account owned by the debtor. Specific rules apply, and banks usually cannot offset funds held in special accounts (like trust or escrow accounts) or certain protected funds (like Social Security).
Do banks have to notify me before exercising the right of offset?
Notification requirements vary by state and the specific account agreement. In many cases, banks may exercise the right of offset without prior notice to the debtor.
How can I protect my funds from offset?
Avoid defaulting on loans or credit cards owed to the same institution where you keep your primary deposit accounts. Be aware that directly deposited federal benefits have automatic protection against offset for private debts. If facing financial difficulty, communicate with your bank proactively about potential hardship options before defaulting.
Related Terms
Need Credit Help?
Discover tools and resources to help improve your credit score and financial health.