What Is The Right To Offset?

What Is The Right To Offset?

Written by Bryan Daly
Fact-checked by Caitlin Wood
Last Updated July 12, 2022

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, while these financial institutions can offer you low-interest rates and flexible payment plans, they might also be able to take certain liberties that you aren’t comfortable with, like the right to offset. 

What Is The Right To Offset?

Also called the ‘right to set off’ or ‘right of set-off’, the right to offset is a clause that some creditors will add to your contract 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 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 a missed payment (although grace periods can vary from creditor to creditor). This is when financial institutions may start to think about implementing the right to offset, which they can do without your permission, a court order or prior notice.

The right offset can be added to any loan, account or credit card agreement and, 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 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, as 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 and at the same financial institution, the right to offset 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 Offset? 

If your lender claims the right to offset and withdraws money from your account to cover an 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, so 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 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 but not limited to:

  • Read Your Contract Carefully – As tedious as it is, the first thing you should do is review your account contract and ask about the right to offset 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 to 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 offset could become a real problem, so the simplest solution may be to avoid borrowing money anywhere until you’re 100% prepared. 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 places that can withdraw your funds because of a debt you owe them. Here are two other creditors 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. 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 offset, 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 Offset FAQs

Can I avoid my account being offset by switching bank accounts?

Yes. If your account is too expensive, you have a loan pending or you want to set aside funds that can’t be offset. Try opening a separate account with a different bank or credit union (one you’re not going to borrow from). This won’t stop other creditors from claiming the right to offset but it should help you retain some savings for financial emergencies.    

What’s the difference between your account being ‘offset’ versus ‘garnished’?

The right to offset is a clause that lenders can add to certain financial contracts, which lets them withdraw funds from your account to cover a debt you owe, as long as it’s held by the same institution. They can also do this without a court order or your permission.   Wage garnishment is a similar legal procedure that allows a third-party creditor to take money from your bank account to pay your debt. However, they must first get a court order that assigns a regular portion of your wages to the creditor until your debt is paid.  

What is an offset bank account?

‘Offset’  means your financial institution is in the process of withdrawing money from your account to cover debt, interest and late fees that you owe them. Watch out, because this can get you denied for new credit, if other lenders see it when they review your finances for potential borrowing purposes. 

How much can the bank take with the right to offset?

It depends on your contract. Most banks and credit unions may use the right to offset when they want or as many times as necessary. But, they can only withdraw up to your total debt amount. If you don’t have enough funds in your account, they may wait until your paycheque is deposited and then extract what they need, like with wage garnishment. 

Looking To Avoid A Lender’s Right To Offset?

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 offset.            

Bryan is a graduate of Dawson College and Concordia University. He has been writing for Loans Canada for five years, covering all things related to personal finance, and aims to pursue the craft of professional writing for many years to come. In his spare time, he maintains a passion for editing, writing screenplays, staying fit, and travelling the world in search of the coolest sights our planet has to offer.

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