The Right of Set-Off, a Major Pitfall in the Suit Process
By Nancy Seiverd, President, CMI Credit Mediators Inc.
About six months ago I received a claim from one of my clients, a logistics provider, who had a customer in central Texas for several years. Unfortunately, through circumstances out of their control, this customer fell into a very difficult financial situation and could not pay the $16,000 receivable balance due. Although the debtor had the will and volition to pay, he strongly insisted they just did not have the capacity to pay all but about $500 per month.
Needless to say after some short consultation with the creditor, we decided to hand the matter over to our attorney partner in Texas for further collection efforts. Subsequently, it was necessary to pursue this claim through litigation and after only a few months, we received a default judgment.
Things were looking good and we hoped there would still be a significant amount of cash in the debtor’s account to garnish and make this a profitable endeavor. However, one of the pitfalls when trying to garnish a debtor’s bank account is that the right to garnish any funds is subordinate to the right of a bank’s set off.
When a debtor has their bank account at an institution to which they also owe money, that institution may have the right under state law to seize any funds and apply them to the debt the debtor has with them. This is known as a “right of set-off." For example, if a debtor has a working capital loan with their bank, the bank has precedence over other creditors to claim funds from the debtor’s checking, money market, or related accounts.
In our case, even though the funds in the debtor’s bank account exceeded the $16,000 owed, the bank’s right to offset superseded our garnishment claim. Unfortunately, we could not seize any of the debtor's funds in the account. In addition, the bank had a lien on all of the debtor’s remaining receivables as well as their movable assets. In other words, we hit a legal brick wall.
Fortunately, the debtor did not dismiss his obligation. Even with all of the legal difficulties, he maintained a desire to pay off the debt as best as he could, and has been doing so for the past few months. In fact, as the economy recovers, we have been negotiating with the debtor to make larger monthly installments.
For the most part, the litigation process through to judgment and garnishing funds has worked successfully countless times in the past. However, there’s still no crystal ball as to any number of twists, turns and surprises (and the right of set offs) that can thwart all the good efforts to try and recover what is rightfully yours.
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