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.
Who owns the money in my bank? ›
“When a depositor makes a deposit, the funds become the property of the bank, and, in exchange, the depositor receives a claim against the bank for the amount of the deposit.”
What happens to the money in my bank account? ›
Only a small portion of your deposits at a bank are actually held as cash. 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.
Who is the owner of money? ›
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.
Can a bank legally keep your money? ›
Yes. Your bank may hold the funds according to its funds availability policy.
Who owns money in the bank? ›
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.
Who controls all your money? ›
The central banks tend to control the quantity of money in circulation to achieve economic objectives and affect monetary policy.
Who runs our money? ›
The Federal Reserve System is the central bank of the United States. Referred to as the Fed, it is arguably the most influential economic institution in the world.
Who controls money? ›
The U.S. central banking system—the Federal Reserve, or the Fed—is the most powerful economic institution in the United States, perhaps the world. Its core responsibilities include setting interest rates, managing the money supply, and regulating financial markets.
Who actually creates money? ›
In most countries the central bank, treasury, or other designated state authority is empowered to mint new physical currency, usually taking the form of metal coinage or paper banknotes.
Unless your bank has set a withdrawal limit of its own, you are free to take as much out of your bank account as you would like. It is, after all, your money. Here's the catch: If you withdraw $10,000 or more, it will trigger federal reporting requirements.
Can the government take money out of your bank account? ›
When Does the IRS Seize Bank Accounts? So, in short, yes, the IRS can legally take money from your bank account. Now, when does the IRS take money from your bank account? Before the IRS seizes a bank account, they make several attempts to collect debts owed by the taxpayer.
Should I pull my money out of the bank? ›
A bank account is typically the safest place for your cash, since banks can be insured by the Federal Deposit Insurance Corp. up to $250,000 per depositor, per insured institution, per ownership category.
Can a creditor take all the money in your bank account? ›
If you fail to make payments, creditors will try to recoup the funds you owe them. In some cases, they may take legal action and request a bank levy. This may freeze your bank account and give creditors the right to take the funds directly from it.
How can I find out who owns a bank account? ›
Unfortunately, it is not possible to identify the owner of an account with just the account number; you need both the routing and account numbers to identify the issuing bank. That's where a private investigators can assist.
Can the government take money from your bank account in a crisis? ›
The government can seize money from your checking account only in specific circ*mstances and with due process. The most common reason for the government to seize funds from your account is to collect unpaid taxes, such as federal taxes, state taxes, or child support payments.
