Before filing a bankruptcy we often advise clients to move bank accounts to another lender to which they don’t owe any debts. The problem is that when a borrower defaults on a debt to a lender that same lender can offset the defaulted debt against any funds they’re holding in an account. So $500 in a bank account can be offset or taken to apply to a defaulted $1000 personal loan. There are restrictions on a lender’s right to setoff funds however. One of the most important is that the Fair Credit Billing Act prohibits a credit card issuer from offsetting funds in an account to satisfy a credit card bill. So if you have a bank account at Wells Fargo the bank is prohibited from offsetting funds in that account against a Wells Fargo issued credit card. An exception to this rule is where you’ve given the bank written authorization to take automatic payments from your account. Another restriction on the ability to offset is where the bank account contains only exempt funds, such as Social Security or child support funds.
Some credit unions may try to assert a security interest in the deposit accounts that would allow them to offset funds but the requirements for having a valid security interest in an account are strict. If you’ve suffered an offset from a bank or are contemplating bankruptcy and owe a debt to a lender where you also have an account be sure to talk to us about it in advance.