The Essential Guide to Understanding the Right of Offset
Being in debt can be a daunting experience, especially when your financial institution intervenes without warning. One of the ways they can step in is by exercising their “Right of Offset“. But what exactly is this, and how does it affect you? In this guide, we will delve into the concept, its implications, and how to navigate this tricky financial situation.
What Is the Right of Offset?
The “Right of Offset” is a concept in banking and law that allows a creditor to balance owed and owed-to amounts between the same two parties. Say, for instance, you borrowed from your bank, thus owing them a debt. Conversely, when you deposit money into your account, the bank owes you that money. If you default on your loan payments, the bank can employ the right of offset to balance these amounts.
This legal maneuver grants financial institutions the authority to deduct money from your bank account to counterbalance any debt you owe them. It’s important to note that they can do this:
- Without requiring a court order.
- Without notifying you in advance.
- Without your consent.
Understanding the right of offset is a crucial aspect of managing your finances. Most financial institutions have a clause in their agreements that explains their right of offset policy and when it is enforced.
How Much Can a Bank Withdraw?
Financial institutions, including banks and credit unions, can exercise their right of offset at their discretion. They can do this as many times as necessary until the debt you owe is fully paid.
There is no legal obligation that requires the bank to leave funds in your account if you owe them more than you have on deposit. If you deposit more money into your account later, like your next paycheque, they can withdraw that money as soon as it arrives.
This can result in a financial shortfall, leading to missed bill payments, additional NSF charges, and exacerbating your financial hardship.
The Right of Offset and Joint Accounts
In general, the right of offset can only be applied under certain conditions:
- If you owe money individually, or you and a third party owe the debt (a joint debt).
- If you hold the account with the same bank.
In some instances, the right of offset can be applied to joint bank accounts, depending on the terms of your account agreement. For example, the agreement may allow the bank to offset debts you owe even if “One or more joint Account holders owe the debt, obligation, or liability, whether alone or together with a third party.”
The concept of joint debts versus joint accounts can be complex, but the important thing to remember is that if you owe the debt and you and your spouse have a joint account at the same bank, the bank can withdraw money for your debt from your joint bank account.
Which Other Creditors Can Exercise the Right of Offset?
Third-party Creditors
Generally, the right to offset cannot be used if the debt is with a third party. The right of offset means that the debt and account are between the same two parties.
For other creditors or debt collectors to withdraw money from your bank account, they must first obtain a formal garnishment order or request to freeze your bank account from the court.
For instance, if you owe money to a telecommunications company, they cannot ask the bank to withdraw money from your account without taking legal action to obtain a judgment and then getting a court order to freeze your account.
If your bank receives an order from a judge allowing a creditor or debt collector to garnish your bank account based on an unpaid debt you owe, the bank must collect that money.
Canada Revenue Agency (CRA)
The CRA has a unique power when it comes to collection and offsetting.
First, the CRA can freeze your bank account without a court order. This is not the same as a right of offset but has a similar effect of limiting your access to funds.
Second, the Canadian government has a statutory right of offset that allows them to withhold money due to you from one government agency to repay monies owing to another agency. For example, CRA can keep your tax refund or HST credits to reduce payments you owe them for tax debts or Canada Student Loans.
Solutions & Avoiding Money Withdrawals: What Can You Do?
If the bank or CRA exercises their set-off rights to collect on a debt, it is a strong indication that you are experiencing financial problems. A bank exercises the right of offset when a customer depositor doesn’t repay a debt due to the bank.
The first and most common solution is to switch your bank account over to another bank that is not holding your debt instrument. Move to a bank that you don’t have a debt with, or they too will be able to apply their right of offset.
However, while this will stop the withdrawals from your account, it does not deal with the underlying debt problem. Depending on the amount of debt you owe and your ability to repay, you may want to consider formal debt relief options, including:
Only a consumer proposal or bankruptcy will provide you with creditor protection from further collection actions.
Conclusion
In conclusion, understanding the right of offset is crucial to managing your finances effectively. If your bank has exercised this right, it’s a sign that your financial situation needs immediate attention. Whether it’s switching your account to a different bank or considering formal debt relief options, there are ways to navigate this tricky situation.
