Tuesday, 31 March 2009

Ooops! Credit Cards and Set Off

If you are in financial difficulties take note that any Bank has a Right of Set Off  within its own books. This is the right to amalgamate credit balances on one account with debit balances on another so long as the legal basis of the account is the same. That could be a joint savings account and a joint overdraft for example. It could also be two accounts at different branches. It could relate to Credit Cards.

In the every day world set off is not normally applied unless there was a case of default going on. In the past a manager might transfer a sum from a deposit account of some kind when an abnormally large cheque was presented. Sometimes the customer was grateful having forgotten to cover the position. The risk was always there that the customers had done the transfer themselves  that day and the transfer would be done twice or that money was coming in from elsewhere and had just not shown yet on the account.  Not being psychic the bank was on a loser. If that was missed and the cheque was returned  the bank was also on a loser. The bank was deemed to know everything somehow and was probably on a loser whatever it did. No one seemed to understand why the bank could not pick up the phone to check the position before returning an item. After all, the customer had banked there for years.

These days, but not quite always, you are most likely to have a cheque returned unpaid if there are insufficient funds in the right account, even with funds on a connected account. It has always been the case that the Law assumes you to have control of your account and to know when Direct Debits, and Standing Orders were due to deplete funds and if you had issued a cheque, to expect it to be presented.

Notwithstanding this, in the event of a default the Bank has a right of set off.  This applies to business accounts as well as to private accounts. The owner of the account has to be the same. The name could be different – an entertainer or writer could have an account in a professional  name for example. However a Limited Company does have separate legal status as a separate entity unless you are tied in by a guarantee.

What has recently started becoming more common is the case of personal Credit Cards. Normally with a debit balance they can be set off against, say, a current account with money on it in the event of default. It has to be the same Bank of course but there may be a set off where previously separate Banks have now amalgamated. Lloyds and HBOS for example. This could be a surprise to you.

A Garnishee Order is rare and hardly ever seen. A Court can order a right similar to set off if a creditor believes there are funds available in a Bank account. When an Order is presented to the Bank the accounts are frozen until it is sorted out.  If however there is a Loan in the same names then the right of set off takes over and usually shows that the net position is in debit anyway.  I have seen a number of Orders in the past and only one arrived in time to catch any balances, either because there was a loan in existence anyway, or the customer had simply transferred funds away shortly before. It isn’t a good thing to have on your Bank CV whatever the case.

So if you are in financial difficulties because you have lost your income, talk to your bank in good time. If you have a Credit Card with the same Bank make sure the discussion includes those balances also. Do not forget the Mortgage Company, if it is your Bank.  If you are a small businessman with a sole trading business take note that the whole lot is under the microscope. You may call it your company and think of it separately but unless you have an incorporated limited company, then  it is still you. If you have personally guaranteed a limited Company it is you also.

The lesson is probably to maintain a small account elsewhere and a separate Credit Card that you only use occasionally. At least you can still get the shopping in.

If you want the street wise view of business or finance see what we think at Bob Shepherd Associates. We move around the Business and Financial world and may have a lot to contribute to your business.

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