The law generally does not allow the bank to offset the debt with money in a checking account. However, there are some situations in which this offset protection doesn’t apply.
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With tax season in full swing, many Americans are planning how to spend their refunds.
But reader Jared from Texas is concerned about whether he will be able to get his hands on his tax refund at all. He inquired about whether his bank can use the tax refund money, once it’s in his checking account, to pay off an old unpaid debt on a credit card issued by the same bank.
Protection against bank’s ability to offset
A bank generally cannot dip into a customer’s bank account to pay off their credit card bills. Legally, the bank’s recourse to this sort of action would be called an “offset.”
Attorney Oscar Javier Ornelas, founder of the Ornelas Firm, clarifies, “Federal law expressly prohibits a credit card issuer [as a general rule] from offsetting a consumer’s credit card debt with funds ‘on deposit’ in the consumer’s bank account.”
The law applies to all forms of consumer credit card debt, including cash advances against the card’s line of credit. However, the general protection against an offset only applies in cases of consumer credit card debt, and not in cases of commercial debt on cards issued to businesses.
The offset prohibition for consumer card debt means that once the funds are in the customer’s account, the bank cannot use them to offset any credit card debt he owes. However, there are some situations in which this offset protection doesn’t apply.
For instance, in case it’s a secured credit card, with the cardholder having specifically agreed to grant a security interest, the offset protection wouldn’t apply.
The offset protection also doesn’t apply if there is a “legal attachment” or court order to seize a debtor’s property. The prohibition against offset also doesn’t kick in when the creditor has gotten a court order, or judgment, to take the funds.
See related: How to handle a surprise tax bill
Your bank has to sue you, and win
The card issuer, which is an unsecured creditor, would have to sue the credit card holder and win a judgment against him before it can gain access to his property and funds to pay off the debt.
Before it goes through this legal process, the issuer might decide to turn to a debt collector or collection agency. If the issuer decides the debtor does not have enough assets to warrant the hassle of going through the legal process, it might even decide to just write off the debt.
The debt could be too old
Our reader Jared said it’s been four years since his card was closed, and the bank still owns the debt, not having charged it off to any outside agency. That means a statute of limitations may apply, debarring the issuer from suing a debtor to collect payment on a “time-barred debt.”
The clock generally starts from the time you make your last payment. The time period the statute of limitations applies to varies from state to state – three to six years is typical for credit card debt, but in some states it’s 10 years. In Jared’s home state of Texas, creditors have up to four years to sue for unpaid card debt, so he may or may not be in the clear.
In case a debt collector contacts you about a past due debt, you should ask if it’s been due long enough that a statute of limitations applies. The collector is legally required to be truthful. In case they decline to answer, you could follow up with a letter asking for the information, within 30 days of your receiving written notification about the debt.
If you make a payment on the debt without realizing that it is past the creditor’s recourse period, it could reset the clock on the statute of limitations period.
In case the creditor sues you even though the debt is time-barred, you should go ahead and respond in court. That way, if the judge decides it is indeed a time-barred debt, they will dismiss the case.
On the other hand, if you don’t respond to the lawsuit, there could be a judgment made against you, allowing your creditor to take recourse to your possessions, including funds in your bank account, to pay off the debt.
As for Jared, his tax refund should be safe, but he might want to consider using it to pay off the old debt.