Bank's Right of SetOff

Question: I own a mobile home and a plot of land on which it is located. There are bank loans outstanding to pay for both the mobile home and the land. I only owe $3,000 on the land. I can no longer afford to pay for the mobile home. If I let the bank take the mobile home and sell the property, can the bank put a hold on the money I get for my land?

Answer:

1. The bank can seize the money you obtain for the land if (a) it obtains a judgment based on the mobile home and enforces the judgment against the proceeds or (b) the proceeds are deposited in the bank, in which case the bank has a common law right of “setoff” which allows it to use funds in an asset account to satisfy any debt owed to the bank (except a credit card, as to which the law has been changed by statute).

2. You are much better off selling the mobile home, if possible, than turning it over to the bank. Creditors sell repossessed property at auctions that often do not bring very much. You almost certainly can do better selling the property yourself, notifying the creditor of what you are doing. The bank has to consent to the release of its security interest, but if it does not and later repossesses and sells the property for less than you had an offer for, you have a good argument that the bank has acted in a commercially unreasonably manner, cannot collect a deficiency, and is liable for statutory damages.

3. If people can avoid doing so, they should not have asset accounts (checking, savings, etc.) at a financial institution to which they owe substantial amounts of money.

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