Bankruptcy

Don't Allow A Mortgage Lender To Invade Your Bank Accounts To Pay Past-Due Payments

By Jonathan Alper

People often are driven to file bankruptcy after a creditor has successfully seized their money. Many banks want the borrower to maintain bank accounts as a condition of getting a home mortgage Often prospective bankruptcy clients tell me they have to file bankruptcy because their bank has taken money out of the debtor?s bank account when the debtor missed one or two mortgage payments owed to the same bank.. People usually complain that the mortgage bank has "garnished" their bank accounts.

Technically, the mortgage bank does not "garnish" an account when it invades the borrower?s checking accounts to force a mortgage payments. Garnishment is a legal tool to collect money owed under a civil judgment; in these examples, the bank does not have a judgment against the borrowed. What the bank is doing in these cases is using a "setoff" remedy. A bank can setoff money its holding for the customer in the customer?s checking accounts to pay a mortgage debt the same customer owes to the same bank. The bank can setoff a checking account only if the customer has consented in writing to a setoff remedy.

The bank?s setoff rights are usually expressed in the promissory note signed in conjunction with the mortgage loan. As an example, one of my bankruptcy clients gave me a copy of their mortgage note with SunTrust. The note included the following language:

"RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a right of setoff in all my accounts with Lender(whether checking, savings, or some other account. ) This includes all accounts I hold jointly with someone else and all accounts I may open in the future....I authorize Lender... to charge or setoff all sums owing on the indebtedness against any and all such accounts, or at al Lender?s option, to administratively freeze all such accounts to allow Lender to protect Lender?s charge and setoff rights provided in this paragraph. "

Note that this provisions applies to all joint accounts. Therefore, if a married couple has a joint account at a mortgage bank and one spouse is indebted under this type of note then the bank can setoff money from a joint account which otherwise is protected from the judgment creditors of either spouse as a tenants by entireties account.

Check your lending agreements to see if your lender has inserted setoff rights. In most cases, do not keep significant checking account balances at the same banks to whom you owe money for mortgage loans, credit cards, or other personal loans.

posted by Jonathan Alper, bankruptcy and asset protection attorney, Orlando, Florida

Full post as published by Florida Bankruptcy Law on January 20, 2009 (boomark / email).