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Setoff with a wrinkle

Our notes include language for "Right of Setoff" to recover past due amounts from any allowable deposit account of the borrower. Does this "right of setoff" work in the reverse fashion so that banks can collect overdraft deposit balances from a closed-end loan product?

Answer by John Burnett: No. Setoff suggests that one party sets off a debt owed it against a debt it owes. You owe me $100 and I owe you $200, so I set off your debt against mine, and now you owe me nothing, and I still owe you $100.

In your example, you have one party (the customer) owing you both on the overdrawn deposit account and on the loan account. You cannot use the concept of setoff in this case.


Answer by Dan Persfull: A loan account is not a deposit account. Unless you have other contract language that would allow it, and dependent on your state law, I would say no, you cannot.


Answer by Andy Zavoina: I have heard of banks adding amounts to loans that were otherwise not related to the loan. Your contract terms will affect this, as Dan noted. You would have to consult counsel on this as I don't know if when it was done, it was truly allowable or just unchallenged.

First published on 12/6/04

First published on 12/06/2004

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