Can Social Security Benefits Be Used to Offset an Overdraft Balance?

Many consumers use one financial institution for all their banking needs: checking, savings, loans, overdraft protection and mortgages. When a bank holds a consumer's deposit accounts as well as credit obligations, it has a legal right to take the money from his checking or savings account to offset (or to set-off) a loan balance if a payment is past its due date.

Exemptions

A creditor may not take certain types of funds to pay a consumer's debt. Such funds include, but are not limited to, Social Security, disability, unemployment, worker's compensation, veteran's benefits, retirement, public and private pensions, public assistance, alimony, spousal and child support. A debtor may use any part of his income to pay down his credit obligations, but a creditor has no right to take it to offset any credit obligation. An overdraft protection is a line of credit that covers any deficiency balance in a consumer's checking account.

Filing an Exemption Claim

If a bank uses exempt income to offset any credit obligation, a consumer should first notify the bank that the funds come from Social Security or other exempt source. If the bank refuses to return the funds back into the consumer's account, the consumer can file an exemption claim form with the local court. At the court hearing, he should present the documentation that shows the source of exempt income. The court will issue an order to the bank to return the funds.

Exceptions

Although banks have the right to offset a consumer's loan accounts with his deposits, the federal law prohibits federally chartered banks to do so with credit card accounts. State chartered banks and credit unions have more freedom to offset debtors' accounts as they abide by state laws. If a debtor believes that a bank wrongfully seized his money to offset his debt, he should contact an attorney in his state to find out what the law states. Also, the loan agreement should state if a bank has a right to offset a past-due debt.

Filing Bankruptcy

A consumer may be able to get back the funds the bank took to offset a debt if he files bankruptcy. He should take this step only if he cannot keep up with the payments. A bankruptcy attorney can assess the situation and determine if a consumer qualifies for a debt discharge under Chapter 7 or will need to negotiate a repayment plan under Chapter 13. If a consumer files for Chapter 13 and sets up a repayment plan, the bank may still be able to use his deposits to offset the debt.