When a debtor has his funds in a bank account at an institution to which they owe money, for example on a working capital loan, that institution may have the right under state law to seize any funds from the debtor’s checking account, money market, or other related accounts, and apply them to any of the debt that the debtor has with the financial institution. This is known as a “right of set-off.”

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 that they just did not have the capacity to pay all but about $500 per month.

Needless to say that 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 were hoping that there would still be a significant amount of cash in the debtor’s account to garnish and make this whole process a profitable endeavor. However, one of the pitfalls to trying to garnish a debtor’s bank account is that the right to garnish any funds is subordinate to the right of the bank’s set off.

In our case, even though the funds in the debtor’s bank account exceeded the $16,000 that was owed, the bank’s right to offset superseded our garnishment claim and unfortunately we could not seize any of the funds from the debtor’s bank account.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 however, the debtor did not dismiss his obligation and even with all of the legal difficulties, he still 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 the ability to garnish funds in a debtor’s bank 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.

Your thoughts and comments (nseiverd@cmiweb.com) are most welcome!

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