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Right of Offset Definition
A financial Institution’s contractual right to withdraw cash from its consumer’s accounts to pay off their debts or liabilities, is called the ‘Right to Offset’. ‘Set-Off’ rights are included in the user agreement before signing up with a service so the institution can access the funds in user accounts and merge them with its own when required.
Banking institutions and tax authorities have the right to ‘set-off’ by default unlike other financial institutions. Section 226.12(d) of the Federal Reserve Board’s Regulation Z, blocks the application of ‘set-off’ rights to claim credit card debts.
A Little More on What is the Right of Offset
Exercising the ‘Right to Offset’ can lead to a series of issues for the customers. For e.g. if you’ve issued a post dated cheque, and the bank withdraws money from your account in the interim to clear your dues, your cheque is bound to bounce leading to a new set of problems. In more serious situations, consumers could lose connections to utility services like electricity or water for late payment due to paucity of funds, or end up defaulting on mortgage payments leading repossessions or evictions.
What Can You Do To Avoid Being A Victim of ‘Set-Off’ Rights?
Consumers should strive to keep their savings accounts and overdraft accounts separate, preferably with different banking institutions. The savings account shouldn’t have the overdraft facility so there’s no option to offset funds. Open this savings account with a bank that you do not owe debts to.
How to Get a Refund on Offset Funds?
The ‘Right to Offset’ comes with a lot of rules, chief amongst which is the bank’s responsibility to check whether you’ll be left with sufficient funds in your account to meet your basic needs like paying rent, mortgage, food bills, and tax dues. Earning income from state benefits also constitutes a special case.
If your bank is guilty of overlooking any of the special conditions under which the ‘Right to Offset’ is barred from being exercised, you can make a case to your bank and get your money back. If the bank refuses to comply with your request, you can exercise the ‘Right of First Appropriation’ to insist on being refunded. Use the appropriate grievance redressal channels available to you to reclaim your money.
References for Right of Offset
Academic Research on Right of Offset
Restrictions on the Right of Offset, Schnee, E. J. (2006). Journal of Accountancy, 201(4), 81. This paper explains the restrictions on the ‘Right to Offset’ on governmental institutions.
Right of Offset vs. Partnership Act in Winding-Up Process, Zeff, S. A. (1957). The Accounting Review, 32(1), 68-70. This paper studies the laws applicable in exercising the Right to Offset in different U.S. states.
Counsel’s Corner: Final Payment and the Right of Offset.. 254, Dunne, G. T., Subordinations, C., & Lopes, B. J. L. 254. This paper discusses the details of the laws that govern the Right to Offset.
Bank’s Right to Offset after Service of a Writ of Garnishment, A, Soussan, S. S., & Cooper-Hill, J. (1985), A. Tex. BJ, 48, 638. This article sheds light on a few legal cases that deal with a bank’s ‘Right to Offset’ under special considerations.
The Internet’s place in the banking industry, DeYoung, R. (2001). Chicago Fed Letter, (163), 1. This paper examines the impact of internet and communications technologies on the banking industry.
Banking Setoff–A Study in Commercial Obsolescence, Dobyns, T. G. (1971). Hastings LJ, 23, 1585. This paper sheds light on the abuses of ‘Set-off’ rights, their basis, and the impact on commercial banking.
Banking Law Developments, Weinstock, P. G., & Klimko, C. T. (1991). Sw. LJ, 45, 1265. This paper studies banking litigation and insolvency issues with a discussion on cases from Texas in the year 1991.
Commercial Banking and the Rate of Interest, Brown, H. G. (1910). The Quarterly Journal of Economics, 24(4), 743-749. This paper studies the link between rate of interests and commercial banking discounts.
Corporate-finance benefits from universal banking: Germany and the United States, 1870-1914, Calomiris, C. W. (1993).(No. w4408). National Bureau of Economic Research. This paper draws comparisons between German and American corporate finance benefits structures in the banking sector.
Offset banking in New Zealand: towards sustainable development, with insight from international models, Denny, J. P. (2011). This thesis discusses Biodiversity Offset Banking in New Zealand and its implication on sustainable development.
The Financial Netting Improvements Act of 2006 Clarifies the Bankruptcy Protections and Promotes Netting for Qualifying Derivatives Transactions, Grosshandler, S., & Sawyer, K. A. (2007). Banking LJ, 124, 523. This is a summary of the amendments made to the Bankruptcy Code’s Financial Netting Improvement Rights Act of 2006.
Offset Rights in Jeopardy, Cocheo, S. (2004). ABA Banking Journal, 96(12), 14. This article highlights the ruling concerning Bank of America’s ‘Offset Rights’ limits, by the California State Court.