It is important to be aware to the right of offset is used by financial institutions and third parties as a strategy for collecting outstanding debt. To protect yourself, keep your money at banks where you don't have debts owing to them or your money could be applied to your debts.
What is the Right of Offset?
Right of offset is a legal right that allows creditors or lenders to seize or "offset" an amount, if a person owes money to a third party, to satisfy a debt they owe to the creditor. In plain English, this means that if you have an account with a bank or third party, and the creditor has a judgment or other legal claim against you, the creditor may be able to use the funds in the account to pay off your debt.
Who Has Right of Offset in Canada?
In Canada, the right of offset is governed by the Bank Act, which gives banks and other financial institutions the right to set off or "offset" a debtor's account to pay off a debt that the debtor owes to the bank. The Canada Revenue Agency also has the right of offset as a tool for collecting debts such as offsetting tax refunds against current debts owing.
How does the right to offset work?
The right of offset is typically used by financial institutions to protect themselves against potential losses. Most banks consider a loan account ‘delinquent’ if there are missed payments resulting in a balance owing. It's at that point when they can begin to start offset your accounts without your consent, court approval or notifying your lawyer.
For example, if a bank loans money to a borrower and the borrower defaults on the loan, the bank may use the borrower's deposits held, to pay off the debt. If you have a $1,000 balance on your credit card and you have $5,000 in your bank account with the same bank, the bank could apply the $1,000 from your bank account to pay your credit card balance.
Is There Any Limit to What Can Be Offset?
There is no limit to what a bank or other financial institution can offset against your accounts. They can take every dollar in your bank account which could cause NSF charges for any future automatic payments coming out of your account.
Can Third-Party Creditors Use Right of Offset?
Yes, the right of offset is not limited to financial institutions, such as banks, credit unions and trust companies, but also telecommunication and utility companies have this right too. However, it is rare for a non-financial institution to offset your account because you are unlikely to keep any money on deposit with them. On the other hand, if you have multiple accounts with a company and one account has a credit balance while the other account has an outstanding balance, then they could use the right of offset to apply one account against the other one.
Do They Need My Permission?
No, your accounts can be offset without you providing or asking for your permission. You could just log into your account one day and see your funds missing. However, you are likely to receive some type of warning such as demand notices to pay before a bank would take this action. Typically, there are some warning signs that they will do this but it can also be unexpected.
Are Any Accounts Exempt from the Right of Offset?
There are some accounts held at most financial institutions which are exempt from the right to offset. For example, registered accounts such as Registered Retirement Saving Plan (RRSP), Tax-Free Savings Account (TFSA) and Registered Education Saving Plan (RESP) are all exempt from the right of offset. However, any unregistered stock accounts could be used to offset any debts owed.
What if I Have Joint Bank Account?
It depends. Every bank or credit union will likely have their own terms for the right to set off and if they have the right to offset where only one account holder has a debt owing. Therefore, it is safer to assume that having a joint account will not protect you from the right of offset.
If you have joint accounts with your spouse at the same financial institution and you have a debt owing, then the bank could still apply the right to set off against the joint account. However, if you and your spouse have separate accounts with the same bank then the bank could only offset your bank account and not your spouse's account. If you have joint debt then you are at risk for the bank to offset both of your bank accounts.
What happens to the Right of Offset in Bankruptcy or Consumer Proposal?
Once a debtor files for bankruptcy or a consumer proposal a creditor's package will be sent out to all known secured and unsecured creditors. When creditors receive this package, they are likely to check if the debtor has a bank account with them and will immediately use the right of offset to apply any debts included in the insolvency. Therefore, if you owe money to the bank where you have an account, it is recommended you change bank accounts before doing beginning this process.
How Can You Avoid the Right of Offset?
There are a few steps you can take to try to avoid the right of offset:
Pay Your Debts on Time
One of the best ways to avoid having your accounts offset is to pay your debts on time. If you have a loan or other debt with a bank or credit union, be sure to make your payments as required to avoid defaulting on the loan.
Use a Different Financial Institution
If you are concerned about the right of offset, you may want to consider using different banks for your different accounts. For example, you could use one bank for your chequing account and another bank for your credit card or car loan. This can make it more difficult for creditors to offset your accounts, as they will need to go through the process of obtaining a judgment or other legal claim against you before they can access your funds.
Consumer Proposal or Bankruptcy
If your accounts are being offset or you are starting to receive demand letters from lenders then you are likely having trouble managing your debts. A consumer proposal or personal bankruptcy will stop any further collection actions from your creditors. It is best to speak with a Licensed Insolvency Trustee to review your financial situation and determine the best course of action.
It is important to be aware of the right of offset to protect your money. Any company that has your money or deposits can have the right to offset it. A simple way to protect yourself is to keep money at banks where you don't have any debt with them. If you currently have immediate concerns or have already had your accounts offset then this may be a larger issue where you should review your overall financial situation.
If you have concerns about the right of offset and how it may affect you, or concerns about your debts, contact Litvack Group for a Free Consultation with a Licensed Insolvency Trustee.