Right of Offset: When Does a Bank Have the Right to Seize Money in Your Account?

Imagine it’s 4 p.m. and you’re ready for a nap or a strong cup of espresso. You walk into a bank or credit union with about a million things on your mind, including a few outstanding debts you need to take care of. Fortunately, all you need to do is open a bank account, get back in your car, and get on with the rest of your day.

The bank officer slides a stack of papers to you. Your only job is to look them over and sign at the bottom. This isn’t your first bank account, so you assume you know what it takes to be a good bank customer.

When you sign all those papers, one of the rights you give the bank is the “right of offset,” sometimes called “set-off.” This gives the bank permission to seize money from your account—but only under very specific circumstances.

While it's scary to think the bank could just take your money, rest assured that's not generally the case. Most of the time, the bank requires a court order to touch your funds, though there are a few exceptions. Let's explore why your money could be seized by the bank and what you can do about it.

When a Court Order Is Required to Seize Bank Account Funds

Your bank account is generally safe from creditors or debt collectors unless the court gets involved. A court order could allow your bank account funds to be frozen or seized in some of these situations.

Tax levy

If you owe unpaid taxes to state or federal tax authorities and it doesn’t look like you’re going to pay those taxes anytime soon, the government could ask the court to issue an order allowing your bank to seize the money you owe from your bank account.

Judgment lien

A loan company or debt collector can't simply ask your bank to seize money because you’ve missed payments. It must sue you for the money, win the case, and then request that the court issue an order for a bank account levy.

Divorce

If you’re divorcing and your soon-to-be ex-spouse is concerned that you may move money, they could petition the court to freeze any accounts you share.

Here’s When a Court Order Is Not Required

The right of offset is a legal principle that allows your bank to take money from your account when you owe the bank. It doesn’t require a court order.

Let’s say you have a personal or car loan through your bank, but it’s been months since you made a payment. The right of offset allows your bank to deduct funds you owe them from your account. However, it must be an account your bank holds; it can’t do that for a third-party creditor without a court order.

The tricky bit is that a bank may inform you in advance, but it doesn’t have to. If you don’t have advance notice, it could lead to bounced checks and overdraft fees.

Important note: The rules governing banks and credit unions can differ. For example, if you have a credit card issued through your bank, it can't use the right of offset to seize late credit card payments. If you bank with a credit union, it may have the right to seize money to pay late credit card payments—provided the credit union issued you the card.

Types of Funds Protected From Bank Seizure

Certain sources of funds are protected from right of offset, particularly if you have them directly deposited into your account. The following types of income are generally protected from seizure:

• Child support

• Alimony payments

• Unemployment benefits

• Social Security benefits

• Social Security Disability (SSDI) benefits

• Pension payments

• Public assistance benefits

• Veterans Administration (VA) benefits

• Retirement account distributions

• Workers’ compensation payments

Important note: It’s possible that your bank could seize funds from your account without knowing the source of the funds. For example, it may not know that your money came from a workers’ compensation payment or retirement account distribution. If that’s the case, contact your financial institution and let it know.

How to Prevent the Bank From Taking Your Money

Most of the situations that could lead to the bank seizing your funds stem from unpaid debts. To prevent seizure, the goal is to ensure all your bills are paid in full and on time. 

That's easier said than done, of course. If you're having trouble keeping up with debt payments, it may be time to contact your creditors to ask them to lower your interest rate, waive fees, or otherwise help you get back on track.

If you're behind on your payments and concerned you can't afford your debts, consider debt settlement. This is when you negotiate with creditors to accept less than you owe and forgive the rest of the debt.

If you don’t want to go it alone, you can work with a debt settlement company that specializes in negotiating with creditors on behalf of its clients. Make it a point to work with a credible company, and be sure you understand the fee structure and how much you can expect to save.