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Why is the “Right of Set-Off” So Dangerous?

Bottom line: it means the bank can take your assets without a court order.  Here’s an example:

Sam has $1000 in a Savings Account at US Bank.  Sam owes US Bank $20,000 on a credit card.  Sam hasn’t paid the credit card in 3 months and is in default.  One day, Sam notices that the $1000 in his savings account has been taken by US Bank as payment on the $20,000 credit.  This is the right of set-off.

Most commonly, people who file bankruptcy experience the effect of “set-off”.  Commonly debtors will owe $5000 to a credit card issued by Chase Bank and also have their checking account at Chase.  Sometimes a debtor will file bankruptcy on Monday and receive their paycheck on Friday.  Chase can “take” the entire balance of the checking account including the paycheck without warning as a set-off against the credit card because the filing of bankruptcy immediately puts the credit card in default..

Recommendation:  If you are considering filing bankruptcy, make sure to get rid of all of your asset checking and savings account from a bank that you owe money to.  This will ensure that the right of set off does not occur.

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