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We received a child support payment for a customer whose deposit account was closed and charged off due to overdrafts. Can we apply the child support payment to offset the unpaid overdraft fees? – IBA Compliance Connection

IBA Compliance Connection

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We received a child support payment for a customer whose deposit account was closed and charged off due to overdrafts. Can we apply the child support payment to offset the unpaid overdraft fees?

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No, we do not believe that your bank may exercise a right of setoff in this situation.

While your deposit account agreement likely provided for a right of setoff relative to funds your former customer had on deposit, that customer no longer has a deposit account or funds on deposit, precluding a right of setoff.

In addition, we believe that it could be viewed as an unfair, deceptive or abusive practice to apply a child support payment to overdraft fees without your former customer’s knowledge, especially since Illinois courts have routinely held that “[s]upport is for the benefit of the child, not the parent or stepparent of the child.”

For resources related to our guidance, please see:

  • Consumer Financial Protection Act of 2010, 12 USC 5536(a) (“It shall be unlawful for (1) any covered person or service provider . . . (B) to engage in any unfair, deceptive, or abusive act or practice.”)
  • In re Brooks, 498 B.R. 856, 861 (Bankr. C.D.Ill. 2013) (“Support is for the benefit of the child, not the parent or stepparent of the child . . . .”)
  • Illinois Marriage and Dissolution of Marriage Act 750 ILCS 5/505(a) (“The duty of support owed to a child includes the obligation to provide for the reasonable and necessary physical, mental and emotional health needs of the child.”)