What’s a Set-off and Why Does the Court Want To Know About It?

A bank set-off is when a bank takes money out of your bank account because you defaulted on a debt you owed to that bank. Normally, creditors have to get a judgment before they can reach the funds in your checking or saving accounts. But there’s an exception to this rule: When you have a credit card or loan with your bank, the agreement you signed (the credit card agreement or loan documents) often gives the bank the right to pay itself directly out of your account if you default. 

Another common form of set-off happens with tax refunds. The federal government can keep all or a portion of your tax refund if you have unpaid tax debts or student loans that are in default. 

A bank set-off is different than a bank levy or garnishment. A bank levy or garnishment generally requires a court order, a bank set-off does not.

So Can Anyone Take Money Out of My Account? 

No. Bank set-offs only happen when you owe money to the bank you bank with, and even then they’re pretty rare. Other creditors, including credit card companies and banks you don’t have any checking or savings account with, have to get a judgment before they can take money out of your account. A creditor can only get a judgment by filing a lawsuit in court. 

Why Does the Court Want To Know About Set-Offs?

The court is concerned with making sure all creditors are treated fairly. If one creditor takes some or all of the money you have in your account right before you file your bankruptcy case, the other creditors are potentially worse off than if you still had the funds when your case was filed. Similar to voluntary payments you may have made to creditors in the 90 days before you filed your case, set-offs can be recovered by the trustee who can then evenly distribute the funds to all of your unsecured creditors.