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
“From legal perspective, a bank account is merely a money claim that the depositor has against the bank.” Bossu and Chew (2015, p. 7): “deposits of money with a bank are legally not deposits, but actually loans — the bank has contractually the right to use the deposit funds by lending them on.”
Does the money in your bank account really belong to you? ›
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.
Is your money actually in the bank? ›
While it enters the bank as one amount, it soon gets broken up. A small amount is set aside as cash reserves, either in the bank's vaults, at other banks or at the Federal Reserve. Banks have historically been required to keep a small stash of cash, typically between 3 and 10 percent of their deposits, on hand.
Is the amount of money that you have got in your bank account? ›
An account balance is the amount of money in a financial repository, such as a savings or checking account. The account balance factors all debits and credits.
Do you trust banks with your money? ›
The FDIC insures up to $250,000 per depositor per FDIC-insured bank. In the nearly 90-year history of the FDIC, no depositor has ever lost a penny of an insured deposit due to a bank closure.
Can a bank deny you access to your money? ›
A bank account freeze means you can't take or transfer money out of the account. Bank accounts are typically frozen for suspected illegal activity, a creditor seeking payment, or by government request. A frozen account may also be a sign that you've been a victim of identity theft.
Do rich people put their money in bank accounts? ›
“Millionaires' checking accounts are all over the place,” Thompson said. “Some clients will only keep enough to pay for immediate expenses (e.g., $10,000) and others will have $150,000 in checking on any given day.”
Where do millionaires keep their money? ›
Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.
Can banks seize your money if economy fails? ›
Banking regulation has changed over the last 100 years to provide more protection to consumers. You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.
How can I protect my money from a bank collapse? ›
Ensure Your Bank Is Insured
If a bank or credit union collapses, each depositor is covered for up to $250,000. If your bank or credit union isn't FDIC- or NCUA-insured, however, you won't have that guarantee, so make sure your funds are at an institution covered by deposit insurance.
Contact your bank or card provider to alert them. Reporting is an important first step to getting your money back, and you could be liable for all money lost before you report it. If you've been targeted, even if you don't fall victim, you can report it to Action Fraud.
Who can access your bank account legally? ›
Make Someone a “Joint Owner” of your Account
You can make someone a Joint Owner of any of your bank accounts while you are living. Any joint owner of a bank account has complete access and rights to the account while you are living and after your death.
Who is the owner of a bank account? ›
The account holder is the person who signs the contract for said account with the bank; this person will also be the owner of the money it contains. Furthermore, if there are any debt due to having taken out a loan, this person will be liable for the tax obligations.
Is my money 100% safe in a bank? ›
As long as your deposit accounts are at banks or credit unions that are federally insured and your balances are within the insurance limits, your money is safe. Banks are a reliable place to keep your money protected from theft, loss and natural disasters.
How much cash can you keep at home legally in US? ›
The government has no regulations on the amount of money you can legally keep in your house or even the amount of money you can legally own overall. Just, the problem with keeping so much money in one place (likely in the form of cash) — it's very vulnerable to being lost.
What is the safest bank right now? ›
Among the safest US banks, according to Global Finance's November 2022 rankings, are AgriBank, US Bank, CoBank, AgFirst Bank, and Farm Credit Bank of Texas, primarily for those in the agricultural sector.
Who owns the money in your 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.”
Do banks play with your money? ›
In short, banks don't take the money that you deposit, turn around and loan it at a higher interest rate. But they do use the money you deposit to balance their books and meet the necessary cash reserves that make those loans possible.
What happens if someone deposits money in my account by mistake? ›
The money isn't legally yours, so you must return it. What's more, the customer whose money accidentally landed in your account will probably notice the mistake and ask the bank to track down the money.
Is money in your bank an asset? ›
If you have money in your checking account, it's considered an asset. If your account is empty or overdrawn, it's not considered an asset, but rather a liability.
