Perhaps you have discovered that your bank has seized money from your bank account to go towards the repayment of a debt that you owe them. This would be your bank exercising its right of offset. Banks are not the only parties entitled to a legal right of offset – the Canada Revenue Agency also has one. In this article, we explain more about what a right of offset is, who has the power to exercise it, and what you can do to prevent it being used against you.
What is a right of offset?
The right of offset is the right for a financial institution to reclaim money they are owed by a debtor on a debt like a credit card debt or a personal loan. Banks and financial institutions will often include a reference on a right of offset in their lending agreements to state that they are entitled to exercise this right. It is known as the right of offset because it is intended to ‘offset’ against the money you owe. In order to access the money in your bank account, banks do not require a court order, they do not need to notify you in advance, they do not need your permission, and they can take money from your checking, savings, or investment accounts. They can take as much money from your account as they need, up to the amount of the debt owed. The bank does not need to leave any money in your account for you to access. In fact, if additional funds are deposited into your account later on, they can take this money too until the debt is repaid in full. This can become problematic for many debtors, as you may find you do not have the funds for every day expenses including bills or groceries. If your bank does not leave you with enough money to cover bills or direct debits, you may be charged a non-sufficient funds fee too, which is unlikely to help you with your ongoing debt problems.
Does the right of offset apply to joint accounts?
A right of offset can apply in the following scenarios:
- If you have owe a debt alone, or if an account is in your name
- If you owe a debt alone, but you have a joint account with a spouse – this is dependent on the terms and conditions of your account
- If you owe the debt with somebody else, but the account is in your name
- If you owe a joint debt, and have a joint account with your spouse
On the contrary, if your spouse owes a debt on their own, but the account is just in your name, the right of offset does not apply.
Which creditors have the right of offset?
The right of offset cannot be applied if the debt is owed to a third party. Instead, the debt and the account must be held by the same parties. For third-party creditors or debt collectors to take money from your bank account, they need to go to court to request a formal wage garnishment order, or request to freeze your bank account. If granted, the bank must collect the money from you to go to the creditor and they do not need to inform you beforehand. It is fairly rare that third party creditors would go through this process for small debts, but large creditors may take action. Where the Canada Revenue Agency is concerned, they have powers most other creditors do not have. They can freeze your bank account without gaining a court order beforehand which can limit your funds. The Canada Revenue Agency also has a statutory right of offset which means they can keep money due to you from the government to go towards repaying your debts. This includes tax refunds and HST credits.
How can you avoid the right of offset?
Generally speaking, if a bank or the Canada Revenue Agency want to exercise their right of offset against you, it is likely that you are experiencing financial difficulty. The first way to protect your account from the right of offset is to keep current on your debt payments when they are due. You should also review your bank statements frequently to ensure you have sufficient funds to cover any pre-authorized payments you may have. If you are worried you will not have the funds to make these payments, contact your bank beforehand to explain your circumstances – you may be able to reach an agreement. Here are the most common ways to avoid the right of offset:
- Switch your bank account to another bank that you do not have a debt with. Banking at more than one bank can be a good idea.
- Consider a form of debt relief to help fix your underlying financial issues.
- Debt management plan – although a debt management plan can help some individuals to get back on track, you must still repay all of your debts. It is often provided by a credit counselling agency whereby they will work with you to create a repayment plan spread across five years. You will often pay the credit counselling agency each month, and they will then distribute this payment to your creditors. While it may be able to stop collection calls and often reduce interest charges, you need to repay your debts in full and it is not legally binding on your creditors.
- Consumer proposal – a consumer proposal is a legal form of debt settlement reinforced by the Canadian government via the Bankruptcy and Insolvency Act. It can reduce your debt by up to 80% while allowing you to keep your assets. A consumer proposal works by working with a reputable Licensed Insolvency Trustee to put forward an affordable monthly repayment across a time period of up to five years. Your Licensed Insolvency Trustee will work to negotiate with your creditors on your behalf. If accepted, you simply make your monthly repayment until it is complete. Filing a consumer proposal also triggers a stay of proceedings which offers full protection from your creditors.
- Bankruptcy – bankruptcy is the legal process of assigning any non-exempt assets you may have over to a Licensed Insolvency Trustee in exchange for the clearance of your debts. It enables you to begin a fresh financial future and prevents creditors from contacting you or pursuing legal action against you.
If you want to learn more about the right of offset, book a free consultation with an expert Licensed Insolvency Trustee at Spergel. We will help you to deal with collection calls and creditors, and can review your financial circumstances with you. We will recommend a pathway to debt relief to help you avoid getting into serious financial difficulty. Get in touch today – you owe it to yourself.