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Also, some state laws limit setoffs.
Most courts have said that banks can't use setoffs to take income that is otherwise exempt under state or federal law, like Social Security benefits, unemployment compensation, public assistance, or disability benefits. But the bank can set off exempt money in our account to cover fees you owe from the same account, like overdraft fees. So, if you owe fees on one account, open a separate account and have future exempt funds sent to that account.
In addition, financial institutions can't take money out of your account to cover missed consumer credit card payments, unless you previously authorized the bank to pay your credit card bill by automatic withdrawals from your account. Be aware that most credit card contracts contain a provision that allows for a setoff if you fall behind on your account. (15 U.S.C. § 1666h, Regulation Z of the Truth in Lending Act, 12 C.F.R. § 226.12(d)).
Some states impose limits on bank setoffs, as well. For example, with limited exceptions, California prohibits state-chartered savings and loan setoffs if the aggregate balance of all your accounts with the financial institution is under $1,000. (California Financial Code § 6660(b)). And in Maryland, bank setoffs for debts for the purchase of consumer goods are prohibited unless you've explicitly authorized the setoff or a court has ordered one. (Maryland Commercial Law § 15-702).
Look Out for Legal Changes
In this article, you'll find details on bank setoff laws, with citations to statutes so you can learn more. Statutes change, so checking them is always a good idea. How courts and agencies interpret and apply laws can change. And some rules can even vary within a state. These are just some of the reasons to consider consulting a lawyer if you're having debt management issues.
To research any limitations on bank setoffs in your state, visit Nolo's Laws & Legal Research Center.
To learn about other ways creditors (including banks) can collect from you, see Debt Collection: Repossession, Wage Garnishment, Property Levies, and More.