Frequently clients tell me about financial horror stories they had with someone and then ask me, Can they do that? One common misconception involves banks, credit unions and demand deposits, otherwise known as savings or checking accounts. People commonly assume their bank account holds their personal money, like a private safe deposit box, just waiting for the customer to come back and retrieve the money.
Unfortunately, when you place money on deposit with a financial institution all you get back is a promise. [Years ago you used to get a promise and a toaster, when banks lured new customers with giveaways like toasters and small household appliances. Today you are lucky to get a calendar or an ink pen.] When you visit the bank to withdraw what you think is your cash, you are drawing upon the bank’s promise to pay you back a specific amount of money – a promise that is not always kept. Here is where some people may think banks do not play fair and why I say people don’t rob banks, banks rob people.
Banks have rules and procedures in place to insure that they do not lose money by letting you withdraw on your deposit. For example, if you recently made a deposit by check, your bank probably will not give you access to that money until the bank is confident the check has been honored by the maker. The bank may tell you there is a “hold” on these funds until the check clears.
If you owe your bank money for a loan payment, bounced check fees, overdraft fees, a bank issued credit card or other charges, your bank may freeze access to any funds on deposit “in your account” until you pay these items. If you fail to honor your payment agreement, many banks will set off money from the account before the bank will let you withdraw money “from your account”. If you need access to that money to pay the power bill today, and you want to pay the bank car loan back tomorrow, you will unhappily learn the bank will follow its rules, not yours.
“That is my money, you cannot tell me who to pay and how to spend it!”
No, that is the bank’s money. It became the bank’s money when you made a deposit – when you gave it to the bank. Granted, the bank owes you money for that deposit, however if you owe the bank money, the bank will perform the freeze and set off in order to pay itself. Only after the bank is paid, will the bank honor its promise.
If you have your paycheck, social security check or monthly income directly deposited in a bank account, you should not have a loan or a credit card through that bank. Otherwise you might find yourself unable to withdraw “your money” from the bank when you need it the most.
One of the most important steps you can take in order to best protect your money is to open a checking or savings account at one bank and to not borrow money from that bank. Keep your savings separate from your loans. Another good tactic is to limit the use of ACH transfers, as pointed out by colleague Jill Michaux in Revoking ACH Payments To Take Back Control Of The Money. Make good use of these tips and you may learn how to avoid filing bankruptcy.
Andy Miofsky, Esq.
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Last modified: October 22, 2012