Your Bank and Relief Payment

If you owe money to the bank or credit union where the feds deposit your $1,200 relief payment, can the bank or credit union take that money to pay itself first? Below is the interrelationship between your bank and relief payment.

Our last blog post was about whether your creditors can seize the $1,200 (or so) pandemic relief payments. Today’s is about one specific class of creditors: your own bank or credit union. What if you have a debt to the financial institution where your relief money is being direct-deposited? Can it pay itself to cover your debt instead of paying you? Would you only get whatever’s left, if any?

The Banker’s Powerful Right of Setoff Your Relief Payment

To force payment from your bank account, most creditors must sue and get a judgment against you first. So the big focus in last week’s blog post was on determining whether you had a judgment against you, and a resulting garnishment order on the bank account where your coronavirus relief payment was arriving. If no judgment, then no garnishment, and the relief payment is safe from creditors.

But the bank where you have your account is different. (All references to banks in this blog post also include credit unions and other financial institutions.) Banks have a right of setoff.

The basic idea is that money you have in a checking or savings account is money the bank owes you. It can set off its debt to you against your debt to it. It zeros out its debt to you (by taking the money in your account) and lowers your debt to it by the same amount. The practical effect is that money comes out of your checking/savings account to pay off or pay towards your debt.

This right is put into likely every contract you enter into with your bank governing your deposit accounts. For example, here’s the pertinent language from a recent 64-page Wells Fargo Bank Deposit Account Agreement:

[W]e have the right to apply funds in your accounts to any debt you owe us. This is known as setoff. When we setoff a debt you owe us, we reduce the funds in your accounts by the amount of the debt. We are not required to give you any prior notice to exercise our right of setoff.

A debt includes any amount you owe individually or together with someone else both now or in the future. It includes any overdrafts and our fees. We may setoff for any debt you owe us that is due or past due as allowed by the laws governing your account. If your account is a joint account, we may setoff funds in it to pay the debt of any joint owner.

So, in general, a bank can take the relief money as it arrives into your account. It uses the money to pay any debt you owe the bank. That debt may be on the account itself—such as an overdraft fee—or any other debt you owe it.

Special Credit Card Law

This right of setoff usually does not apply to unsecured consumer credit card debts. Under Federal law

A card issuer may not take any action to offset a cardholder’s indebtedness arising in connection with a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer…

15 U.S.C. Section 1666h(a). For more details see the related regulations at 12 C.F.R. § 1026.12(d).

So, if you owe your bank on a credit card, it can’t take your relief payment to pay that debt. (This assumes the bank hasn’t sued you and received a judgment and garnishment on that account.)

Special Closed Account Rule

What if you had an account at a bank but either you’ve closed it or the bank has done so? In particular, what if the relief payment is slated to come to that closed account? That’s what would happen if you had the IRS send last year’s tax refund to that account (while still open).

In this situation, the bank can’t take your relief payment to pay a debt you owe to the bank. Its right to setoff is cut off when either you or the bank close the account. 31 C.F.R. § 210.4(c)(3).

This means that the bank has to return the payment to the IRS (actually the U.S. Treasury). Then you should receive the payment by paper check through the mail. How long before you’d receive that check? The lower your income the quicker the IRS is mailing the paper checks. Here’s a recent article listing the mailing dates based on your adjusted gross income.

Therefore, in some circumstances, it may make sense to close your account to prevent setoff. The delay in receiving the payment may be worth avoiding losing some or all of it through setoff. Then of course when you receive the check, cash, or deposit it at a different financial institution.

If this is your situation you’d likely benefit from talking with a bankruptcy lawyer about this, and about your overall financial options.

Important Exception to the Closed Account Rule

Be careful about one important twist. If you believe your bank closed your account because of unpaid fees, it may not actually be closed. The bank may have charged off the account with a negative balance but not legally closed that account. Then this closed-account exception would not apply. The bank could pay the unpaid fees with your relief payment when it hits your account. It could also set off any other debts you may owe to the bank (other than credit cards). Again, this is a situation to discuss with a lawyer.

Local Pandemic Collection Protections May Apply

Last week we gave a list of state emergency orders preventing seizure of the relief payments to pay ordinary creditors. Most of these addressed creditor garnishment of bank accounts. Most did not directly address the separate question of setoffs by the banks themselves. However, some of those orders did so, including:

• California Governor’s Executive Order N-57-20 (April 23, 2020)
• Maryland Governor’s Order 20-04-29-03 (April 29, 2020)
• New York Attorney General Guidance on CARES Act Payments (April 17, 2020)
• Connecticut Banking Commissioner’s Guidance on CARES Act Payments (April 16, 2020) (voluntary)

This situation is constantly changing so it’s worth seeing whether your state has created similar setoff protections.

Some Banks’ Voluntary Policies

Some individual banks have announced that they’re not exercising their setoff rights specifically regarding relief payments. These include JP Morgan Chase, Citibank, Bank of America, USAA, and Wells Fargo, and likely others.

Because these are voluntary and temporary, the exact details will vary at each bank and may change. They may even vary customer by customer. So be careful, and find out whatever details you can before relying on these voluntary policies.