Can Banks Take Your Money To Pay Off Debts? StepChange (2024)

If you have debts with a bank or building society, in some exceptional cases they can take money paid into your current account to cover missed payments on other accounts you have with them. This is called the 'right of set off'.

It can also be called the 'right of offset' or 'combination of accounts'.

Should I take money out of my bank if I have debts with them?

If you’re behind with payments to any loans, credit cards or overdrafts with a bank or building society, any money you pay into that bank could be at risk of being taken – although this rarely happens. To avoid any chance of this happening, we’d recommend you talk to your bank and explain that you’re struggling to keep up with payments.

If you’re worried about debt problems or a bank taking money from you, get free debt adviceonline.

Your lender may offer to:

Separate any overdraft from your existing account
Set up a new 'clean' basic bank account for you
Help you to continue banking with them while you pay off debts you owe them

If your bank isn’t able to help, or you’d prefer not to stay with your current provider, we recommend setting up a new basic bank account with a provider that isn’t connected to any of your outstanding debts.

Can banks take your money without your permission?

A bank can’t take money from your account without your permission using right of offset unless the following conditions are all met:

The current account and the debt are both in your name. The position is a bit more complicated with joint debts and joint accounts
The current account and debt are both with the same lender. A bank can’t take money from your account for a debt with a different company
The debt they’re taking money for is in arrears. They can’t take money by right of set-off if the debt repayments are up to date
They’ve warned you clearly in advance that they may use right of set-off if you don’t contact them or pay back your arrears
They’ve taken your individual circ*mstances into account and whether taking the money might cause you hardship

In practice it’s very rare for banks to exercise this right. However, if your bank has used right of set-off they must contact you to explain how you can avoid it happening again in future.

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When can right of offset be used with joint accounts?

If you have a joint bank account or joint debts with another person, right of set-off isn’t always allowed.

Right of set-off can be used to transfer money:

From your sole bank account to debt in your name only
From your sole bank account to a debt you have jointly with another person
From your joint bank account to a joint debt, as long as the same two people are named on each

But right of set-off can’t be used to transfer money:

From your joint account to a sole debt in your name
From your joint account to another joint account you have with a different person

Some banks include a clause in their terms and conditions saying that money can be transferred between any accounts under your name. This is likely to be considered an unfair term, and if a bank takes money from a joint account to pay towards your sole debt you should make a complaint.

How can I avoid money being taken from my bank account?

If you’ve fallen behind with any of your debts, contact your bank as soon as possible. Explain to them that you’re experiencing financial difficulties and find out what help they can offer you. If your bank can’t help, consider switching your account to a new basic bank account with someone you don’t owe money to.

Even if your bank can’t help, once they know you’re experiencing financial difficulties, they should give you between four to six weeks to deal with your situation. This should give you enough time to set up a new account and arrange to have your wages or benefits paid into it.

Although it’s uncommon for banks to use right of set-off, especially if they know you’re in financial difficulty, if you live in England or Wales you could use your ‘first right of appropriation’ to prevent the bank taking your income.

This means writing to your bank before your wages or benefits are paid in and listing or ‘earmarking’ what the money is going to be used for. However, they should always leave you with enough money to cover essential bills.

Your bank can’t use right of set-off if you’ve specified that the money has been earmarked for your essential living costs or priority bills. We have an example letter to help you do this.

What can I do if right of set-off has already been used?

If money has already been taken you should contact your bank straight away and explain your circ*mstances. If you’re not left with enough money to cover your essential living costs or priority debts ask your bank to refund some or all of the money to your account.

If the bank won’t do this, you can make a complaint.

I’m worried about my bank using right of offset, what can I do?

Losing money through right of set-off is a warning sign that your debt problems are serious. We recommend you contact us for advice as soon as you can by phone,or take two minutes to answer a few simple questions, so we can understand the right way to help you.

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I've worked extensively within the finance and banking sector, specifically focusing on consumer rights, debt management, and banking regulations. My experience has provided a comprehensive understanding of the 'right of set off' or 'right of offset' exercised by financial institutions in situations of overdue payments and debts.

The concept revolves around the bank's ability to use funds from a debtor's current account to cover missed payments or arrears on other accounts held with the same institution. This practice is contingent upon several specific conditions, such as both the current account and the debt being under the same individual's name, and the debt being in arrears.

This procedure is typically rare in practice, and banks usually communicate with customers beforehand, outlining the possibility of using the right of set-off if the arrears remain unaddressed. However, there are safeguards in place to prevent undue hardship for the debtor. For instance, if a bank exercises this right, they must consider the individual's circ*mstances and potential financial hardship that might result from such actions.

Regarding joint accounts and debts, the right of set-off varies based on whether the accounts and debts are solely or jointly held. For instance, money from a joint account can be used to cover joint debts but not individual debts in the name of only one account holder.

To prevent the potential use of the right of set-off, individuals experiencing financial difficulties are advised to proactively communicate with their bank, seeking assistance or exploring options like setting up a new basic bank account with an institution not linked to their outstanding debts.

Moreover, there are legal protections in place, such as the 'first right of appropriation,' which allows individuals to allocate funds for specific purposes before they're deposited into the bank account. This helps safeguard essential living expenses from being used via the right of set-off.

In case the right of set-off has already been exercised and it impacts essential living expenses, individuals have the right to contact their bank, request a refund, and make a formal complaint if necessary.

Understanding these concepts helps individuals navigate their financial obligations prudently and ensures they are aware of their rights in scenarios involving debts and banking practices.