During your life, you may have to occasionally borrow money from your bank or credit union to mortgage a home, finance a car or pay off debt. Unfortunately, these financial institutions can offer you low-interest rates, flexible payment plans, and even allow you to check your credit score for free.
But, they might also be able to take certain liberties that you aren’t comfortable with, like the right to set-off.
What Is The Right Of Set-Off?
Also called the ‘right to offset’. The right to set-off is a clause that some creditors will add to your contract. Usually when they think you have more chance of defaulting on your loan due to negative factors, such as bad credit. If you miss multiple payments, it allows them to legally seize funds from your bank accounts to set-off a debt you owe.
How Does The Right To Set-Off Work?
Most banks and credit unions will consider your loan account ‘delinquent’ after about 30 days of no payment. Although grace periods can vary from creditor to creditor. This is when financial institutions may start to think about implementing the right to set-off. Which they can do without your permission, a court order or prior notice.
The right set-off can be added to any loan, account or credit card agreement. Once they use it, a financial institution can legally withdraw the debt you owe (plus interest and penalties) from any chequing, savings or investment account you have with them.
Joint Accounts And The Right To Set-off
Before you sign up with a bank or credit union, it’s very important to read the terms and conditions of your membership contract. The right to set-off can affect the finances of anyone you hold an account with. That’s because a joint account typically implies that each individual or third-party account holder shares its debts, liabilities and obligations.
Essentially, if you and your spouse or common-law partner have an account that’s in both of your names and at the same financial institution, the right to set-off can apply to it. If the account is under one spouse/partner’s name, they’re solely responsible for all debt.
What Can You Do If Your Account Is Set-Off?
If your lender claims the right to set-off and withdraws money from your account to cover outstanding debt, there are a few things you should do, such as:
- Request A Refund – It’s entirely possible that your financial institution made a mistake. Start by contacting customer service to ask about getting a refund.
- Negotiate – If your debt is real but you have a good explanation for it. The lender may give you a more reasonable payment plan that better suits your finances.
- Confirm Legality – If you’re insolvent, can’t afford your debt or think your lender is scamming you, call a legal professional, like a lawyer or financial advisor.
How To Stop Your Account From Being Set-Off
Does the right to set-off make you anxious? In that case, there are several steps you can take to prevent a lender from offsetting your account, including but not limited to:
- Read Your Contract Carefully – As tedious as it is, the first thing you should do is review your account contract. Don’t forget to ask about the right to set-off when you apply.
- Set Up Notifications – At your request, most financial institutions will gladly send you automatic text messages or email reminders to pay your bills on time.
- Monitor or Switch Accounts – Review your statements regularly. If your account is too pricey, change accounts or set up a separate account with another lender.
- Tell The Lender In Advance – If you know you’re about to default on a debt, call your financial provider right away. Ask about arranging a better payment plan or deferring your payment for a few months.
- Pay Your Debt – It can be painful to watch your account balance drop. But paying your debt off early is far safer than accumulating more interest and late penalties.
- Don’t Borrow – The right to set-off can become a real problem. The simplest solution may be to avoid borrowing money anywhere until you’re 100% prepared. You can also avoid your account being set-off by applying with a bank or lender that you do not bank with. In general, a bank only has the right to set-off if you bank with them and borrow from them.
Who Else Has The Right To Set-Off?
Banks and credit unions aren’t the only places that can withdraw your funds because of a debt you owe them. Here are two other creditors that can implement the right to set-off:
- Third-Party Lenders – The right to set-off usually can’t be applied unless the debt and the associated account are held by the same financial institution. Some of these other lenders and debt collectors may attempt to obtain court orders. Afterwards, your wages may be garnished or accounts frozen if you owe them enough legitimate debt.
- Canada Revenue Agency – The CRA can freeze your bank account without a court order. Plus, the federal government has a statutory right to set-off, which lets them withhold money that they owe you to repay other government debts. For example, they may use your tax credit to repay your Canada Student Loan.
Right To Set-Off FAQs
Can I avoid my account being offset by switching bank accounts?
What’s the difference between your account being ‘offset’ versus ‘garnished’?
What is an offset bank account?
How much can the bank take with the right to set-off?
Looking To Avoid A Lender’s Right To Set-Off?
It’s always important to do research and gain some proper knowledge before you sign up for any financial account or debt product in Canada. While it may not be the end of the world, an offset account could leave you with a lack of money for your other expenses, which is never a good thing. So, don’t forget to ask your lender about the right to set-off.
