In order to cover a loan in default, a bank has a legal right to seize funds of a guarantor or the debtor. A settlement of mutual debt between a creditor and a debtor through offsetting transaction claims is also known as setoff. Through this settlement, a creditor can collect a greater amount than they usually could under bankruptcy proceedings. When a setoff clause is entered into, the bank can seize the customer's current deposit. A bank exercising a right of setoff must fulfill the following conditions :
1. the account from which the firm transfers funds must be held by the customer owing the firm money;
2. the account from which the firm transfers the money and the account from which the money would otherwise have come, must be held with the same firm;
3. both account must both be held in the same capacity by the customer; and
4. the debt must be due and payable.
Most banks have the right to transfer cash from your bank or savings accounts to pay off other debts held with them, such as credit cards or loans. It's known as the right to "'set-off", or to combine accounts.
