What’s a set off and why does the court want to know about it?

A set off is when a bank takes money out of your bank account because you defaulted on your payment obligations on a debt owed to that bank. Normally, creditors have to get a judgment before they can reach the funds in your checking or saving accounts, but there is an exception to that general rule: When you have a credit card or loan with your bank, the agreement (either the credit card agreement or the loan documents) will often give the bank the right to pay themselves directly out of your account in the event of a default. 

So can anyone take money out of my account? 

No. Set offs only happen when you owe money to the bank you bank with, and even then they’re pretty rare. Other creditors, including credit card companies and banks you don’t have any checking or savings account with, have to get a judgment before they can take money out of your account. A creditor can only get a judgment by filing a lawsuit in court. 

What if I file bankruptcy and owe money to my bank?

Once your bankruptcy case is filed, the automatic stay prohibits the bank from setting-off (taking) any of the funds in your bank account. This is true even if you owe money to the bank. Credit unions sometimes have a security interest in the funds their members have in their bank account - check out this guide to learn more about that.

Wells Fargo has a habit of freezing bank accounts when a bankruptcy case is filed. They do this even when they're not owed any money.^[1] Since it can be quite stressful to deal with getting them to un-freeze your account, it's best to keep the majority of your funds in an account with a different bank when your bankruptcy case is filed.

Why does the court want to know about set offs?

The court is concerned with making sure all creditors are treated fairly. If one creditor takes all of the money you have in your account (or some of it) right before your case is filed, the other creditors are potentially worse off than if you still had the funds when your case was filed. Similar to voluntary payments to creditors made in the 90 days before a case is filed, set offs can be recovered by the trustee so the funds can be distributed equally to all of your unsecured creditors.