Relationship Banking: Who is it good for?

Have you noticed how much your bank or credit union wants to have a “relationship” with you? It’s almost like they’re stalking us. Open a checking account and your banker is suddenly your best friend – and favorite lender. And it can be convenient – for the banker.

If you have your checking or savings accounts with the same place you are borrowing money, you can set-up direct deposits, automatic payments, make easy transfers, and sometimes get better rates on the loans. That’s the upside. The downside is that you may lose the choice not to pay those debts if you are running short. And that could mean you pay your bank’s credit card but can’t pay your mortgage. Good for the bank; bad for you.

Many loan or account agreements say you agree the bank or credit union can “setoff” the deposit account balance to pay a debt you owe the bank. Even if the agreements do not say this, the law of your state may allow it. So without going to court, your bank can decide whether you pay their credit card this month, not you. They can decide you have to pay their signature loan and bounce your other checks, not you. The bank will control your financial future, not you.

So, you say, “I’ll file bankruptcy and stop the bank taking my money.” Not so fast. Bankruptcy law “does not affect” a creditor’s right to setoff, under §553. The Supreme Court has ruled this means the bank or credit union can temporarily freeze your account – bouncing your checks – and get court permission to take the money later. Citizens Bank of Maryland v. Strumpf (1995)

Keep in mind the bank is not entitled to take your account if the money was deposited after you filed bankruptcy (except possibly for overdraft accounts), since this would violate the automatic stay. And some courts have held you could recover setoff accounts if you can exempt it in your case. Not all courts agree, though. See, e.g., In re Arnold (Bankr.W.D.Mo. 1996) and In re Eggemeyer (Bankr.S.D.Ill. 1987).

So don’t be so quick to do one-stop shopping. If you bank where you don’t owe anything, it may cost a little more money and time. But you stay in control. That can be worth a lot.

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