Under Connecticut law, there is “[t]he equitable right to cancel or offset mutual debts or cross demands, commonly used by a bank in reducing a customer’s checking or other deposit account in satisfaction of a debt the customer owes the bank.” (Emphasis added.) Black’s Law Dictionary (6th Ed.1990) p. 1372; see Normand Josef Enterprises, Inc. v. Connecticut National Bank, 230 Conn. 486, 494, 646 A.2d 1289 (1994).
The most common situation is where a customer owes money on a credit card and the customer also has a checking account. The bank can offset the funds in the checking account against the credit card balance.
Bankruptcy Code Section 553
(a)Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that—
(1)the claim of such creditor against the debtor is disallowed;
(2)such claim was transferred, by an entity other than the debtor, to such creditor—
(A)after the commencement of the case; or
(i)after 90 days before the date of the filing of the petition; and
(ii)while the debtor was insolvent (except for a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, or 561); or
(3)the debt owed to the debtor by such creditor was incurred by such creditor—
(A)after 90 days before the date of the filing of the petition;
(B)while the debtor was insolvent; and
(C)for the purpose of obtaining a right of setoff against the debtor (except for a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, or 561).
(1)Except with respect to a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, 561, 365(h), 546(h), or 365(i)(2) of this title, if a creditor offsets a mutual debt owing to the debtor against a claim against the debtor on or within 90 days before the date of the filing of the petition, then the trustee may recover from such creditor the amount so offset to the extent that any insufficiency on the date of such setoff is less than the insufficiency on the later of—
(A)90 days before the date of the filing of the petition; and
(B)the first date during the 90 days immediately preceding the date of the filing of the petition on which there is an insufficiency.
(2)In this subsection, “insufficiency” means amount, if any, by which a claim against the debtor exceeds a mutual debt owing to the debtor by the holder of such claim.
(c)For the purposes of this section, the debtor is presumed to have been insolvent on and during the 90 days immediately preceding the date of the filing of the petition.
In the first instance, a bankruptcy court will look to state law to determine if a Bank can offset a debt of a customer against another account of the customer in the same bank.
However, Regulation Z limits the right of a bank to offset accounts, on consumer credit card payments.
12 C.F.R. 226.12
(d)Offsets by card issuer prohibited.
(1) A card issuer may not take any action, either before or after termination of credit card privileges, to offset a cardholder’s indebtedness arising from a consumer credit transaction under the relevant credit card plan against funds of the cardholder held on deposit with the card issuer.
(2) This paragraph does not alter or affect the right of a card issuer acting under state or federal law to do any of the following with regard to funds of a cardholder held on deposit with the card issuer if the same procedure is constitutionally available to creditors generally: Obtain or enforce a consensual security interest in the funds; attach or otherwise levy upon the funds; or obtain or enforce a court order relating to the funds.
(3) This paragraph does not prohibit a plan, if authorized in writing by the cardholder, under which the card issuer may periodically deduct all or part of the cardholder’s credit card debt from a deposit account held with the card issuer (subject to the limitations in § 226.13(d)(1)(related to billing errors)
Paragraph 3 provides for automatic withdrawals, not setoffs, if authorized in writing