The need to borrow money may creep up from time to time, especially when it comes to buying a home, car, or covering other major expenses. While lenders charge interest as a way to earn a profit, many offer low rates, flexible payment plans, and the option to check your credit score for free.
However, lenders may also exercise certain liberties that you aren’t comfortable with, like the right to offset. Read on to find out what a right to offset is, how it works, and what you can do if your account is set off.
Key Points:
- The right to offset is a legal provision that allows financial institutions to withdraw funds from your account to cover debts you owe them.
- Lenders can tap into your account, often without prior notice or consent.
- The right to offset can be added to any bank account, loan product, or credit card agreement.
- If your account is offset, you can request a refund, negotiate, or contact a lawyer if you believe you’re being scammed.
What Is The Right To Offset?
The right to offset is a clause that some creditors will add to your contract, usually when they think you have a greater chance of defaulting on your loan due to negative factors, such as bad credit. If you miss multiple payments, this clause allows them to legally seize funds from your bank accounts to offset a debt you owe.
How Does The Right To Offset Work?
Most banks and credit unions will consider your loan account ‘delinquent’ after about 30 days of no payment, though grace periods can vary among creditors. At this point, financial institutions may consider implementing the right to offset, which they can do without your permission, a court order, or prior notice.
The right to offset can be added to any loan, account, or credit card agreement. Once lenders use it, they 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 Offset
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 offset 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 at the same financial institution, the right to offset can apply. But if the account is under one spouse/partner’s name, they’re solely responsible for the debt.
Learn more: Dealing With Debt In A Marriage
Signs That Your Account May Be At Risk Of Offset
If your account is at risk of offset, there are several warning signs to watch for:
- Missed Payments: The most obvious sign that your account may be at risk is missed payments on loans, credit cards, or lines of credit held with the same financial institution. If you’re behind on payments, your bank or lender may exercise the right to offset without notice.
- Collection Calls: Receiving collection calls is another red flag. You might also receive notice alerts about low account balances, which could be a sign that your bank is keeping tabs on your funds.
- NSF Fees: Non-sufficient funds (NSF) fees or unexpected withdrawals may indicate that an offset has already occurred.
What Can You Do If Your Account Is Offset?
If your lender claims the right to Offset and withdraws money from your account to cover outstanding debt, there are a few things you can 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 you have a good explanation for your debt, 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 Offset
Does the right to offset make you anxious? In that case, there are several steps you can take to prevent a lender from offsetting your account, including the following:
- 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 offset when you apply.
- Set Up Notifications: At your request, most financial institutions will 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 fees are too high, change accounts or set up an 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: If possible, pay your debt off early, which can help you avoid accumulating interest and late penalties.
- Don’t Borrow: The simplest solution may be to avoid borrowing money anywhere until you’re 100% prepared.
- Don’t Borrow And Bank With The Same Institution: You can also avoid your account being offset by applying with a bank or lender that you do not bank with. In general, a bank only has the right to offset if you bank with them and borrow from them.
Who Else Has The Right To Offset?
Banks and credit unions aren’t the only entities that can withdraw your funds because of a debt you owe them. Here are two other parties that can implement the right to offset:
- Third-Party Lenders: The right to offset usually can’t be applied unless the debt and the associated account are held by the same financial institution. That said, some other lenders and debt collectors may attempt to obtain court orders to garnish your wages or freeze your accounts.
- Canada Revenue Agency (CRA): The CRA can freeze your bank account without a court order. Plus, the federal government has a statutory right to offset, which lets them withhold money, such as your tax refunds, to repay other government debts.
Final Thoughts
Before signing up for a financial account or debt product in Canada, make sure you’re familiar with what you’re getting into. While the right to offset may not be the end of the world, it could still leave you with less money in your pocket. So, don’t forget to ask your lender about the right to offset and whether it applies in your situation.
