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What every banker should know about a bank's setoff rights
It's oh-so-tempting. Your customer owes you money and there sits his deposit account or CD just begging to be grabbed. Maybe he's terribly delinquent and you want to stem your loss. Perhaps he's current, but you've found an event of default under the contract and you feel a need to act quickly to ensure the bank gets paid. Or maybe he's been paying as agreed with your debt, but now the IRS is coming after him and you envision a tug-of-war over assets. In each of those situations, and many others, you must know precisely what your rights are (or aren't!) with respect to setoff.
In some situations, it is perfectly permissible to exercise a right of setoff against assets you're holding of a customer if the customer owes you money. Seize funds at the wrong time, however, or in the wrong way, and you're headed for a lawsuit. Before you act, you need to understand the three circumstances that must exist before setoff can take place, plus you need to know about special statutory and regulatory provisions that can affect your rights.
Among the topics to be addressed are the following:
- Three requirements that must always exist for setoff to be proper.
- Setting off against one deposit account for overdrafts and fees incurred in another.
- Special provisions that can come into play, such as the Reg Z provision relating to setoff and credit card debt.
- Contractual provisions to look for on setoff.
- Consequences of exercising setoff when you shouldn't.
- Setoff and the bankruptcy preference period.
- Setoff and the automatic stay in bankruptcy.
- What are "special deposits" and why should you care?
- If the customer dies before you perform your setoff and the account has a POD beneficiary, what then?
- Common mistakes - and how to avoid them.
Questions and Answers