John Roska: When ex misses car payment, am I stuck?
Q: I co-signed a car loan for a boyfriend. We broke up, and he took the car. I had my own bank account where we got the car loan. When my ex-boyfriend missed a payment, the bank took everything from my account. Is that legal? Don't they have to give me some kind of notice first, or take me to court?
A: If you're a real co-buyer, it's legal. You're then just as liable as your boyfriend, and the bank can exercise their right of "set off" against your account.
A recent column dealt with the difference between co-buyers, who are primarily liable on a debt, and guarantors, who have secondary liability. Secondary liability on a car loan means they can't try to collect from you until they've first sued the other person.
Skipping the messy details, you're a real co-buyer—and not just somebody who signed as one — if you're a parent or spouse of the other co-buyer; if your name's on the car title; or if you actually use the car.
If you're a real co-buyer, you're primarily liable on the car loan, just like your ex-boyfriend. The bank can enforce your liability by "setting off" your bank account against your debt.
You probably signed something that explicitly gave the bank permission to do that. But even if you didn't, that right is generally implied between banks and their customers. Lawyers call it the bank's common law right of set off.
Bank set offs can occur when you're both creditor and debtor with the bank. A checking or savings account makes you the bank's creditor, and makes the bank your debtor. They owe you money.
But you're a debtor on any loan you have with the bank, since you owe them money.
So, if your ex-boyfriend missed a payment on a loan where you're a real co-buyer, the bank can exercise its set off right against your deposit at that same bank. The bank don't have to give you advance notice. If it did, you'd withdraw your money, so there'd be nothing left to set off.
It's risky, then, to borrow where you bank. If you have doubts about your own solvency, or about the solvency of people you co-sign loans for, keep your deposits and loans at separate banks.
That risk is the same with shared deposits. If your ex-boyfriend had been the only person on the loan, but you shared an account at the same bank, they could zap that shared account for his default.
Parents should be careful, then, before they add a child's name to their account "for convenience." In addition to allowing Sonny to help pay Mom's bills, it exposes the shared account to the bank's set off right to repay debts Sonny may have with the bank.
The one exception to the general right banks have to set off debts against deposits is for credit card debts. The federal Fair Credit Billing Act says the bank that issues your credit card can't take money from your deposits at that bank unless you've agreed, as their credit card customer, to pay the card from your bank deposit.