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When you owe money to the bank, whether it’s through a line of credit or a credit card, the bank can take money right out of your account if you fail to keep up with payments. This is known as the right of offset, and if it happens to you, it can be a serious wake-up call that forces you to deal with financial difficulties. Unfortunately, it can also make your financial problems even worse.
What Is the Right of Offset?
The right of offset allows a creditor to net funds owed between the same two parties. If Party A owes Party B $1,000, but Party B owes Party A $200, Party A can simply pay Party B $800 rather than going through both transactions.
Now, when you use a credit card issued through your bank, you owe that money back to the bank. When you deposit your paycheque in your chequing account, the bank owes that money to you. The bank can use this legal technique to withdraw money directly from your account without notification in certain situations generally related to non-compliance with repayments when due.
Using the right of offset, the bank can withdraw a sum up to what you owe them directly from any bank account you have with them, including chequing, saving, and investment accounts.
If this happens, you should talk to debt experts about your options moving forward. If your bank has resorted to using the right of offset, it’s a sign that you are in serious financial trouble, and it may be about to get worse.
How Much Money Can the Bank Take?
Whether you keep your money with a bank or a credit union, your financial institution can use the right of offset as many times as they need to, at their discretion, until they have collected the amount you owe them.
The right of offset in Canada does not include any provision requiring the financial institution to leave any funds in your bank account. If you owe more funds than you have in your account, they can empty it completely. If you still owe them money and you deposit a paycheque, they can take that as well.
That’s in contrast to other jurisdictions. For example, in California, banks are required to leave $1,000 in consumers’ accounts. In Canada, you need to pursue other avenues if you want to protect the income you have.
Can Third-Party Creditors Use the Right of Offset?
As a general rule, yes, as long as there is a debt owing by you to them, and a debt owing to you by them, third-party creditors have the right of offset in Canada. However, it is highly unlikely that this scenario would occur. This is because in general, non-financial institution third party creditors, which includes utility providers, payday lenders, debt collectors, or even cell phone providers do not maintain deposit accounts for you against which they could use the offset rules. However, if you had two cell hone accounts, one with a credit and the other with an outstanding balance, they could use the offset rules to transfer the credit from one account to the other.
However, if you were delinquent on your phone bill, Bell could not ask your bank to withdraw that money from your bank account on your behalf. Bell would have to take legal action through the court and could then potentially freeze or garnish your bank account. This is more likely to happen with larger debts than small collections like a phone or internet bill. Small debts are more likely to go to collections. However, if a creditor successfully gets a judgement to garnish your account, your bank must comply.
Canada Revenue Agency and the Right of Offset
There is one important exception when it comes to third parties and your bank account: the CRA and their unique powers. When you owe the CRA tax debt, the CRA can freeze your account without having to get a court order. The bank sends the money in the account to the CRA. They can do this without notifying you ahead of time. This is not technically the same as the right of offset but has the same effect.
Right of offset laws also give the Canadian government the ability to withhold money owed to you. This includes tax refunds or HST credits. They can even do this between agencies, i.e., the CRA can withhold a tax refund if you’ve been delinquent on Canada Student Loan payments.
Can the Bank Take Money from Joint Accounts?
The terms of the right of offset may differ from bank to bank, but in general, keeping money in a joint account will not necessarily protect it.
If you and your partner have a joint debt, the bank can withdraw funds from a joint account. However, they can also use the right of offset even if only one party in a joint account owes them funds.
However, the bank cannot use the right of offset on a spouse’s individual account if the other party has a debt.
How the Right of Offset Can Make Financial Problems Worse
Juggling multiple debts is always a stressful task. You can wind up put in a position where you have to prioritize one account or the other, especially if you don’t have enough money coming in to pay all of your bills. You can wind up facing collection calls, your credit score can suffer, and you can wind up in an endless cycle of debt.
This alone is a major financial warning sign. If you have to choose to pay one bill over another, it’s time to talk to a Licensed Insolvency Trustee about a plan for getting out of debt. The sooner you act, the more options you have.
When the bank starts to use the right of offset, it can set off a spiral of financial problems. When your bank account suddenly doesn’t have any funds in it, you can wind up facing overdraft fees after you go to pay for essentials or pay down a different type of debt. It can lead to you missing car loan payments or paying utility bills, leading to repossession or utilities getting shut off. You can wind up short on your rent payments or unable to pay your mortgage, leading to housing uncertainty and stress.
With no money in your bank account, you can wind up relying on credit cards to cover essential expenses. But if you don’t have the funds to pay those down, the interest charges accumulate, and you wind up paying more and more.
Being in debt is expensive, and it’s why getting out of debt is so important to your financial success. If your bank has used the right of offset, it’s not too late, but it’s time to find a new course of action.
What Can You Do About the Right of Offset?
The right of offset can be disruptive to your finances and leave you with none of your income. The best way to prevent the bank from withdrawing money from your account again is entering into the insolvency process. You can do this with a consumer proposal or filing for personal bankruptcy.
When you file for a consumer proposal or bankruptcy, you get immediate relief from collection actions, including the right of offset through an automatic stay. However, the stay only affects the right of set-off for funds deposited to the account after the stay is put in place. Any funds in the account may still be used to off-set a debt owing to the same financial institution. A stay gives you a chance to get back control of your finances, keep your income, and give yourself a chance to work with a debt expert toward getting out of debt.
While there are other options, such as debt management plans or consolidation loans, none of them provide legally binding creditor protection. The bank can continue to use the right of offset, and other creditors can continue with collection actions.
In addition to staying collection actions, insolvency gives you an opportunity to get out of debt with the financial resources you have. If you’re earning an income, a consumer proposal can work well as a way to protect your assets and repay your creditors, including the bank, with a plan that you can afford. The amount of principal you have to repay will likely be reduced, and you will no longer have to pay interest. Throughout the period of your consumer proposal, you will be protected from financial institutions using the right of offset on your account.
How to Avoid the Right of Offset Without Insolvency
The bank withdrawing money directly from your account is a sign that you need to take some kind of action about your finances. However, if you’re not ready to file for insolvency or you’re pursuing other actions, one thing you can do is to open an account with a different bank.
There are a number of reasons to use multiple banks, including saving on ATM fees or benefiting from better interest rates. Most importantly, even if you’re deeply indebted to another bank, if you don’t have any debts with your second bank, they can’t withdraw funds. The first bank will have to pursue another course of collection action. However, you may only be buying yourself some time.
For help with a Toronto consumer proposal or filing for bankruptcy, get in touch with David Sklar & Associates. If you are at the point where your financial institution is using the right of offset, your finances aren’t working, and they are about to get worse. Consider this a warning sign. You’ve overextended yourself, and now it’s time to seek help from a debt expert.