Can banks take money for debts?
"If I miss a payment on my credit card, personal loan or mortgage can the bank take cash to out of one of my other accounts to make the payment?"
Unfortunately, the simple answer to this is yes.
Money carefully stored in bank and savings accounts is not safe and untouchable, at least from the banks.
Financial institutions have the right to move around the money they hold to pay off outstanding debts.
You could feasibly call this stealing.
In fact, it's somewhat similar to credit card providers' right to hold a main credit cardholder liable for debts on an additional card. The two balances might look different to the two cardholders but to the bank they're one and the same.
The banks call it 'setting off' or 'combining accounts.'
How it works
All banks have the right to set off by matching money to debts in this way and many use it. The precise nature of the house rules are set out in their terms and conditions.
For example, here's how Barclaycard's small print has described the rule of 'setting off' in the past:
(a) we owe you money on a current, savings or other account under this agreement or another agreement with us; and
(b) you have failed to pay us any amount you owe us on an overdraft, Personal Reserve, credit card, personal loan (including a mortgage) or any other credit agreement you have with us, we may use the money we owe you to reduce or repay the amount you owe us. This is called a right of "set off".
Most banks issue these small print warnings but note that they don't have to: they actually have an automatic right to 'set off' even without expressly telling their customers.
Even if the rule isn't mentioned in the terms and conditions of your product it doesn't make any difference.
Even more alarmingly, banks also have the right to take the money from your account without letting you know.
In fact, they often prefer to take action without prior notice to prevent the debtor from simply moving their money out of the account before the bank can touch it.
They only have to tell the account holder after the money has been taken.
When is it a problem?
According to Citizens Advice, more and more people are being hit with this little known power.
Between 2007 and 2009 the number of 'setting off' cases the charity dealt with jumped up by 25%.
Although some may reason that it is fair enough for a bank to take money that is rightfully theirs, this action doesn't take into account the other more pressing priorities that might be facing a customer.
Paying rent, for example, may be impossible if a bank decides to take an unexpected sum and is a much more pressing problem than debt repayment.
Being unaware of the bank's action is the most dangerous part, as it could cause the account holder to unknowingly dip into overdraft and rack up fees and charges.
What's the solution?
There are a number of different ways to avoid being caught out by this rule.
First, it's worth noting that a bank should only take money from a current or savings account if a debt has both severely defaulted and the borrower has made no effort to solve the problem.
The simple act of contacting the bank over a missed payment and working towards a solution should, therefore, mean that it decides against the extreme measure of setting off.
Customers who have been communicating with the lender and were nevertheless hit by setting off it could well be worth complaining, see the section below for more details.
Holding debt in a different institution to assets is another simple solution.
However, it can be hard to determine exactly what signifies a 'separate institution'.
Banks could move money between institutions in the same group: see these groups here.
Moving money to different banks
Remember that it is usually easier to move savings than to move debt.
Make sure to browse around for the top deals and transfer any direct debits over to the new account, many current account providers can do this automatically as part of a 'switching service'.
Getting debt advice
There is help available for those defaulting on debt and disagreeing with their bank.
Our full sources of advice article lists many free face to face, phone and online debt advice services which will be able to help.
It's also worth noting that banks must make extra provision for their most vulnerable customers.
Complaining about setting off decisions
Finally, the Financial Ombudsmen Service (FOS) is a free, independent service for banking complaints and the next step for those who feel that the right to set off has been used unfairly.
Although they cannot dispute a bank's right to set off, they can assess the situation and demand money back if they adjudicate that the bank was unfair.
They do this by looking at discussions between the customer and their bank during the period leading up to the set off to see whether the bank took appropriate action to make the consumer aware that it was concerned about the unpaid debt.
The FOS has offered consumers compensation in the past when it found that banks had used the right to set off unfairly by failing to enter into a discussion about the debt payments and caused the customer distress.