Given the economic uncertainty caused by the current health crisis, many borrowers may be forced to default on loans or lines of credit they have with their banks. It is therefore an important time to understand the legal relationship between a bank and a depositor, and the bank’s right of setoff.
Take a look at the balance in your checking or savings account. How much of that money actually “belongs” to you? You may be surprised to learn that, in New York, the funds in a general bank account do not technically belong to the depositor. At the moment of deposit, the funds become the property of the depository bank.
Thus, as a depositor, you are in essence a creditor of the bank. Once the bank accepts your deposit, it agrees to refund the same amount, or any part thereof, on demand.
As a result of this relationship, New York bankinginstitutions have a long-established common law “right ofsetoff.”Under the right of setoff, where a borrower is indebted to the bank, the bank may deduct funds from the borrower’s savings or checking account to satisfy a matured debt.
For example, imagine that you maintain a checking account and a line of credit with the same bank. If you default under the line of credit, the bank can simply deduct the funds from your checking account – without any advance notice to you – to satisfy the balance due under the line of credit. The bank is only required to provide notice to you on the day the setoff occurs.
This scenario was played out in a seminal case twenty five years ago.* There, a customer took out a $40,000 unsecured line of credit with his bank, which was subsequently converted into a 90-day note. After the customer defaulted, the bank exercised its right of setoff and applied approximately $40,000 of funds in the customer’s account toward the balance due under the note. The customer asserted a claim against the bank, alleging that the bank’s exercise of setoff was unauthorized. The trial court dismissed the claim. Upon appeal, the decision was affirmed, with the court holding that the bank had “an absolute right to setoff,” that was properly exercised by advising the customer of the setoff “on the same day that the setoff occurred.”
*Fenton v. Ives, 222 A.D.2d 776, 634 N.Y.S.2d 833 (3d Dep’t 1995).
FAQs
At the moment of deposit, the funds become the property of the depository bank. Thus, as a depositor, you are in essence a creditor of the bank. Once the bank accepts your deposit, it agrees to refund the same amount, or any part thereof, on demand.
Does money actually belong to you? ›
The depositor does not own a right to the exact dollars he deposited; instead, he has a right to demand payment from the bank for the amount deposited.
Is your money actually in the bank? ›
While it enters the bank as one amount, it soon gets broken up. A small amount is set aside as cash reserves, either in the bank's vaults, at other banks or at the Federal Reserve. Banks have historically been required to keep a small stash of cash, typically between 3 and 10 percent of their deposits, on hand.
Is the amount of money that you have got in your bank account? ›
An account balance is the amount of money in a financial repository, such as a savings or checking account. The account balance factors all debits and credits.
Do you trust banks with your money? ›
That's because banks have sophisticated security systems and technologies to protect your money and guard against theft and fraud. What's more, most bank deposits are insured by an agency of the federal government.
Who can access your bank account legally? ›
Only the account holder can authorize transactions to and from that account. For a spouse to access their partner's bank account, there must be a specific and legally recognized reason for doing so, like when they have been granted power of attorney or they are the main beneficiary of that account.
Who controls all the money in the world? ›
The central banks tend to control the quantity of money in circulation to achieve economic objectives and affect monetary policy.
Can banks seize your money if the economy fails? ›
It indicates an expandable section or menu, or sometimes previous / next navigation options. Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.
Where do millionaires keep their money? ›
Cash equivalents are financial instruments that are almost as liquid as cash and are popular investments for millionaires. Examples of cash equivalents are money market mutual funds, certificates of deposit, commercial paper and Treasury bills. Some millionaires keep their cash in Treasury bills.
Can a bank deny you access to your money? ›
Banks may freeze bank accounts if they suspect illegal activity such as money laundering, terrorist financing, or writing bad checks.
Criminal charges: Unauthorized withdrawal from a bank account is considered a crime and may result in criminal charges such as embezzlement, theft, or fraud. Civil charges: The bank may file a civil lawsuit against the person for the unauthorized withdrawal of funds.
Can the government see how much money is in your bank account? ›
The IRS probably already knows about many of your financial accounts, and the IRS can get information on how much is there. But, in reality, the IRS rarely digs deeper into your bank and financial accounts unless you're being audited or the IRS is collecting back taxes from you.
How much money is actually in a bank? ›
Banks tend to keep only enough cash in the vault to meet their anticipated transaction needs. Very small banks may only keep $50,000 or less on hand, while larger banks might keep as much as $200,000 or more available for transactions. This surprises many people who assume bank vaults are always full of cash.
Is my money 100% safe in a bank? ›
Savings accounts are a safe place to keep your money because all deposits made by consumers are guaranteed by the Federal Deposit Insurance Corporation (FDIC) for bank accounts or the National Credit Union Administration (NCUA) for credit union accounts.
Should I worry about my money in bank? ›
Your money is safe in a bank with FDIC insurance. A bank account is typically the safest place for your cash, since banks can be insured by the Federal Deposit Insurance Corp.
What is the safest bank in the US? ›
Summary: Safest Banks In The U.S. Of April 2024
| Bank | Forbes Advisor Rating | Learn More |
|---|
| Chase Bank | 5.0 | Learn More Read Our Full Review |
| Bank of America | 4.2 | |
| Wells Fargo Bank | 4.0 | Learn More Read Our Full Review |
| Citi® | 4.0 | |
1 more rowJan 29, 2024
Since property is an enjoyment protected by law, it is as such the enjoyment of two goods: the good which is an object of law and the law itself which satisfies the need of legal certainty. This means that a person is not only the owner of money but he has also the right to claim it.
What percentage of money is actually real? ›
Question: What Percentage of the Money Supply Is In Physical Coins and Currency? Answer: About 10% of the $60 trillion of money worldwide.
Is it true that money is not everything? ›
Money isn't everything since it can't buy us the essential things in life: health and love. One of the most important things in life is your relationships. Friends and family are the people who will be there for you through thick and thin, and they are worth more than any amount of money.
Does money determine your self-worth? ›
"Money is not a measure of someone's self-worth, it's a measure of your net worth," he explained. While money may give you more choices, it does not control your value as a friend, family member, or person.
