Can banks take money for debts?

taking money for debts

"If I miss a payment on my credit card, personal loan or mortgage can the bank take cash to out of one of my other accounts to make the payment?"

Unfortunately, the simple answer to this is yes.

Money carefully stored in bank and savings accounts is not safe and untouchable, at least from the banks.

Financial institutions have the right to move around the money they hold to pay off outstanding debts.

You could feasibly call this stealing.

In fact, it's somewhat similar to credit card providers' right to hold a main credit cardholder liable for debts on an additional card. The two balances might look different to the two cardholders but to the bank they're one and the same.

The banks call it 'setting off' or 'combining accounts.'

How it works

All banks have the right to set off by matching money to debts in this way and many use it. The precise nature of the house rules are set out in their terms and conditions.

For example, here's how Barclaycard's small print has described the rule of 'setting off' in the past:

8.1 If:
(a) we owe you money on a current, savings or other account under this agreement or another agreement with us; and
(b) you have failed to pay us any amount you owe us on an overdraft, Personal Reserve, credit card, personal loan (including a mortgage) or any other credit agreement you have with us, we may use the money we owe you to reduce or repay the amount you owe us. This is called a right of "set off".

Most banks issue these small print warnings but note that they don't have to: they actually have an automatic right to 'set off' even without expressly telling their customers.

Even if the rule isn't mentioned in the terms and conditions of your product it doesn't make any difference.

Even more alarmingly, banks also have the right to take the money from your account without letting you know.

In fact, they often prefer to take action without prior notice to prevent the debtor from simply moving their money out of the account before the bank can touch it.

They only have to tell the account holder after the money has been taken.

When is it a problem?

According to Citizens Advice, more and more people are being hit with this little known power.

Between 2007 and 2009 the number of 'setting off' cases the charity dealt with jumped up by 25%.

Although some may reason that it is fair enough for a bank to take money that is rightfully theirs, this action doesn't take into account the other more pressing priorities that might be facing a customer.

Paying rent, for example, may be impossible if a bank decides to take an unexpected sum and is a much more pressing problem than debt repayment.

Being unaware of the bank's action is the most dangerous part, as it could cause the account holder to unknowingly dip into overdraft and rack up fees and charges.

What's the solution?

There are a number of different ways to avoid being caught out by this rule.

First, it's worth noting that a bank should only take money from a current or savings account if a debt has both severely defaulted and the borrower has made no effort to solve the problem.

The simple act of contacting the bank over a missed payment and working towards a solution should, therefore, mean that it decides against the extreme measure of setting off.

Customers who have been communicating with the lender and were nevertheless hit by setting off it could well be worth complaining, see the section below for more details.

Holding debt in a different institution to assets is another simple solution.

However, it can be hard to determine exactly what signifies a 'separate institution'.

Banks could move money between institutions in the same group: see these groups here.

Moving money to different banks

Remember that it is usually easier to move savings than to move debt.

Make sure to browse around for the top deals and transfer any direct debits over to the new account, many current account providers can do this automatically as part of a 'switching service'.

Getting debt advice

There is help available for those defaulting on debt and disagreeing with their bank.

Our full sources of advice article lists many free face to face, phone and online debt advice services which will be able to help.

It's also worth noting that banks must make extra provision for their most vulnerable customers.

Complaining about setting off decisions

Finally, the Financial Ombudsmen Service (FOS) is a free, independent service for banking complaints and the next step for those who feel that the right to set off has been used unfairly.

Although they cannot dispute a bank's right to set off, they can assess the situation and demand money back if they adjudicate that the bank was unfair.

They do this by looking at discussions between the customer and their bank during the period leading up to the set off to see whether the bank took appropriate action to make the consumer aware that it was concerned about the unpaid debt.

The FOS has offered consumers compensation in the past when it found that banks had used the right to set off unfairly by failing to enter into a discussion about the debt payments and caused the customer distress.

Comments

1
8 November 2014
Michelle

I noticed today on checking my bank account and lucky I did, that the bank went into my personal checking account and removed money for payments for two other loan accounts. I had made the payments already 3 days previous and they cleaned out our account withdrawing the payments again. They have not been pre-authorised to do this and they did not contact us at any time before or after. Time to change banks!

2
3 August 2014
Bobby Stranger

What happens regarding bank mergers? If I owe Barclays, but for safety, bank with Halifax, then the two merge, can Barclays help themselves to the money?

4 August 2014
Choose team

It would depend on the terms of the merger but, basically, yes. Banks can't 'set off' debts with savings if those two are kept at separate institutions but if two seperate banks merge or become part of the same group, they may be able to do so.

The rules are similar to (but not exactly the same as) the banking licence rules consumers need to know to ensure savings are protected by the FSCS. Find out more about those here.

3
10 June 2014
Brad

If I have a debt with my Santander account can they take money from my Barclays account??

4
12 July 2013
angry customer

Can a bank take out more money even if I have a payment plan already with them? They said they wrongly put it into my account and I only took it out as I thought it was the money they were supposed to take out once a fortnight - and put it in my e-saver.

5
15 September 2012
Martin

Read section 1.3 of the same retail banking agreement. This agreement does not apply to:
(a) any lending products (other than overdrafts and Personal Reserve) or to any Barclaycard products; or

How then can they apply set-off against a credit card. Section 1.3 overides anything in section 8.

15 September 2012
Choose team

Hi Martin,

Basically, Section 1.3 is talking about what product this agreement applies to, Section 8 is referring to money owed to a customer under this agreement (e.g. money held in a current account) could be taken to pay back money owed by the same customer to Barclays under any other agreement, which could include a credit card or a mortgage.

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