Given the economic uncertainty caused by the current health crisis, many borrowers may be forced to default on loans or lines of credit they have with their banks. It is therefore an important time to understand the legal relationship between a bank and a depositor, and the bank’s right of setoff.
Take a look at the balance in your checking or savings account. How much of that money actually “belongs” to you? You may be surprised to learn that, in New York, the funds in a general bank account do not technically belong to the depositor. At the moment of deposit, the funds become the property of the depository bank.
Thus, as a depositor, you are in essence a creditor of the bank. Once the bank accepts your deposit, it agrees to refund the same amount, or any part thereof, on demand.
As a result of this relationship, New York bankinginstitutions have a long-established common law “right ofsetoff.”Under the right of setoff, where a borrower is indebted to the bank, the bank may deduct funds from the borrower’s savings or checking account to satisfy a matured debt.
For example, imagine that you maintain a checking account and a line of credit with the same bank. If you default under the line of credit, the bank can simply deduct the funds from your checking account – without any advance notice to you – to satisfy the balance due under the line of credit. The bank is only required to provide notice to you on the day the setoff occurs.
This scenario was played out in a seminal case twenty five years ago.* There, a customer took out a $40,000 unsecured line of credit with his bank, which was subsequently converted into a 90-day note. After the customer defaulted, the bank exercised its right of setoff and applied approximately $40,000 of funds in the customer’s account toward the balance due under the note. The customer asserted a claim against the bank, alleging that the bank’s exercise of setoff was unauthorized. The trial court dismissed the claim. Upon appeal, the decision was affirmed, with the court holding that the bank had “an absolute right to setoff,” that was properly exercised by advising the customer of the setoff “on the same day that the setoff occurred.”
*Fenton v. Ives, 222 A.D.2d 776, 634 N.Y.S.2d 833 (3d Dep’t 1995).
FAQs
At the moment of deposit, the funds become the property of the depository bank. Thus, as a depositor, you are in essence a creditor of the bank. Once the bank accepts your deposit, it agrees to refund the same amount, or any part thereof, on demand.
Does money actually belong to you? ›
“It is now well established that the property in the customer's money passes to the bank following its deposit and that 'money paid into a bank account belongs legally and beneficially to the bank and not the account holder'.”
Do banks actually use your money? ›
Only a small portion of your deposits at a bank are actually held as cash at the bank. The rest of your money (the majority of the bank's assets) is invested by the bank into vehicles such as consumer or business loans, government bonds and credit cards. Borrowers have to pay the bank back with interest.
Can a bank keep your money from you? ›
Generally, a bank may take money from your deposit account to make a payment on a separate debt that you owe to the bank, such as a car loan, if you are not paying that loan on time and the terms of your contract(s) with the bank allow it. This is called the right of offset.
Is money in your bank account assets? ›
Assets are things you own that have value. Your money in a savings or checking account is an asset. A car, home, business inventory, and land are also assets.
Can the government take money out of your bank account without your permission? ›
The IRS can take money out of your bank account when you have an unpaid tax bill, but levies aren't automatic. If you owe unpaid tax debts to the federal government, the IRS has to follow the proper procedures in order to take money from your bank account.
Who can access your bank account legally? ›
Only the account holder has the right to access their bank account. If you have a joint bank account, you both own the account and have access to the funds. But in the case of a personal bank account, your spouse has no legal right to access it.
What to do if a bank won't give you your money? ›
File banking and credit complaints with the Consumer Financial Protection Bureau. If contacting your bank directly does not help, visit the Consumer Financial Protection Bureau (CFPB) complaint page to: See which specific banking and credit services and products you can complain about through the CFPB.
How protected is your money in the bank? ›
The FDIC provides deposit insurance to protect your money in the event of a bank failure. Your deposits are automatically insured to at least $250,000 at each FDIC-insured bank.
What is the safest bank to put your money in? ›
JPMorgan Chase, the financial institution that owns Chase Bank, topped our experts' list because it's designated as the world's most systemically important bank on the 2023 G-SIB list. This designation means it has the highest loss absorbency requirements of any bank, providing more protection against financial crisis.
Since property is an enjoyment protected by law, it is as such the enjoyment of two goods: the good which is an object of law and the law itself which satisfies the need of legal certainty. This means that a person is not only the owner of money but he has also the right to claim it.
What is not considered an asset? ›
Business assets include money in the bank, equipment, inventory, accounts receivable and other sums that are owed to the company. Hence, a building that has been taken on rent by the business for its use would not be regarded as an assets because company have no ownership of that building.
What if someone deposits money in my account? ›
You cannot keep money that was mistakenly deposited into your account; it must be returned. Failing to report and return the money could result in legal consequences, such as criminal charges. Contact your bank immediately when you notice the error and keep records of your interactions.
Is it true that money is not everything? ›
It can also help us achieve our goals and aspirations, such as traveling, pursuing education, or starting a business. However, it's important to remember that money is not everything and many other factors contribute to our overall happiness and success, such as relationships, health, and personal fulfillment.
Does money determine your self-worth? ›
Bertman said you just have to realize that money is just something you use. "Money is not a measure of someone's self-worth, it's a measure of your net worth," he explained.
Who owns the currency? ›
The U.S. Federal Reserve controls the money supply in the United States. However, it doesn't actually print currency bills itself. The Department of the Treasury prints bills based currency amounts set by the Fed.
