Bank Set-Off & Auto-Debit on Delinquent Credit-Cards
Philippine Legal Overview (2025)
1. Concepts & Definitions
| Term | Meaning in Philippine banking practice |
|---|---|
| Set-off / compensation | A bank unilaterally applies (“offsets”) the balance of a customer’s deposit account against the customer’s matured obligation to the same bank. Rooted in Arts. 1278-1279, Civil Code (compensation occurs when two persons are mutual debtors and creditors of each other, and their obligations are due, demandable, and liquidated). |
| Automatic Debit Arrangement (ADA) | Pre-authorized, recurring transfer of funds from a deposit account to settle another account (loan, utility bill, credit card, etc.). Operates as a standing instruction rather than a legal right of set-off; it needs express, continuing consent from the depositor. |
| Delinquent credit card account | A credit-card balance that is past-due under the schedule in the card agreement or BSP rules (30 days past statement date is the industry threshold for “past-due”; 90 days qualifies as “non-performing”). |
2. Statutory Foundations
Civil Code of the Philippines
Arts. 1278-1290 – Compensation
- Mutual principal obligations, both due and demandable, may extinguish each other ipso jure.
- Bank deposits are simple loans—the bank owes the depositor (Art. 1980); thus a bank may become both debtor (for the deposit) and creditor (for the credit-card debt).
Art. 1306 – Autonomy of Contracts allows parties to extend, limit, or waive compensation by agreement.
Republic Act No. 8791 (General Banking Law, 2000)
- §55.1(b) – Prohibits banks from freezing or offsetting deposits to answer current or unmatured obligations unless the depositor has expressly agreed or the obligation is already past-due.
- §55.2 – Any violation renders bank officers personally liable and subjects the bank to BSP sanctions.
Republic Act No. 10870 (Philippine Credit Card Industry Regulation Law, 2016)
- Empowers the Bangko Sentral ng Pilipinas (BSP) to issue rules on billing, collection, and “other practices affecting cardholders.”
- Requires fair treatment and reasonable disclosure before collections—notice is essential before set-off or ADA debits.
Truth in Lending Act (RA 3765) & BSP Circular No. 1048 (2020)
- Full disclosure of finance charges and collection fees includes any intent to apply set-off or ADA.
Data Privacy Act (RA 10173)
- Using internal deposit data for set-off is considered “compatible purpose,” but disclosure to third-party collectors requires data-subject consent.
3. Regulatory Framework
| BSP Instrument | Key Provisions for ADA & Set-off |
|---|---|
| MORB §X263 / §1325Q | Depositor must sign a separate, specific authorization for ADA; blanket clauses buried in credit-card contracts are not sufficient. |
| BSP Circular No. 928 (Aug 31 2016) “Guidelines on Automatic Debit Arrangements” | • Written mandate (wet or digital) describing: amount or formula, frequency, start/end dates, and cancellation procedure. • Immediate, no-charge revocation via branch or digital channel. • Mandatory SMS/e-mail alerts for every debit (or at least once a month for recurring equal amounts). |
| BSP Memorandum No. M-2020-006 (Consumer Protection During COVID-19) | Bank must obtain fresh consent before debiting deferred credit-card payments from government-supplemented deposits (e.g., SAP, ayuda). |
| BSP Circular No. 1160 (2023) “Enhanced Consumer Protection Standards” | • Prior notice of at least five banking days before effecting set-off on a delinquent revolving account. • Prohibits set-off or ADA on deposits clearly identified as trust, escrow, or payroll unless expressly allowed by the depositor in a separate instrument. |
| Anti-Money Laundering Act IRR | Debiting is treated as an internal book transfer (low ML/TF risk) but must still be traceable. |
4. Supreme Court & Appellate Jurisprudence
| Case | G.R. No. / Date | Key Ruling |
|---|---|---|
| Citibank, N.A. v. Spouses Cabamongan | 146918, 23 Feb 2005 | Deposit and credit-card liability may be set-off only when the card balance is “due and demandable,” and provided the cardholder had constructive notice through the card agreement. |
| Development Bank of the Phils. v. CA | 114692, 26 Jan 1996 | Banks may legally offset, but must respect the Bank Deposits Secrecy Law (RA 1405): no public disclosure of set-off details without consent. |
| PNB v. Pineda | 121267, 10 Dec 1998 | Confirmed that a bank deposit is a loan; compensation is not subject to garnishment rules because a bank is merely paying itself. |
| Sumitomo Mitsui Banking Corp. v. Velasco | 190289, 19 Jan 2022 | ADA debits executed after a borrower’s revocation are void (bank must promptly restore funds). |
| Allied Banking Corp. v. CA (Alayon) | 90002, 26 May 1995 | Cross-default clause valid, but deposits in a joint account may only be offset against joint debts, not against one co-depositor’s individual credit card. |
Trend: The Court generally upholds the bank’s right of set-off if the obligation is past-due and there is contractual basis, but it strictly enforces notice, consent, and specificity requirements.
5. Contractual Basis – What Credit-Card Terms Usually Say
Cross-Default / Right of Offset Clause Typical wording: “The Bank may, without notice, set off or appropriate any funds in any of the Cardholder’s accounts, singly or jointly, against any amount owed under the Card.” Enforceability: Valid unless (a) it contradicts specific statutes (e.g., payroll protection), or (b) it is unconscionable under Art. 24 Civil Code.
ADA Enrollment Form Must be signed separately – BSP requires the depositor to tick boxes specifying the account number, max amount per debit, and frequency. Electronic enrollment via the bank’s app is allowed if it includes two-factor confirmation.
Revocation / Opt-out BSP Circular 928: Revocation must be processed within one banking day after request. Fees for revocation are disallowed.
6. Consumer Protections & Remedies
| Scenario | Consumer Rights / Steps |
|---|---|
| Unauthorized set-off or ADA | • File a written complaint with the bank; bank must respond within 7 banking days under BSP Circular 1160. • Escalate to BSP Consumer Assistance Mechanism (ConsAffairs@bsp.gov.ph) if unresolved after 15 days. |
| Deposit classified as “Restricted” (payroll, government benefit, trust) | Bank cannot offset unless separate, explicit written consent exists. Consumer may demand reversal plus interest. |
| Joint or Fiduciary Account affected | Raise violation of Arts. 216-225 (fiduciary obligations) or co-ownership rules; ask BSP to direct bank to restore funds. |
| Harassment by collectors after set-off | Invoke RA 10870 §9(f): Prohibits abusive collection, including repeated calls when debt is already settled by offset. File complaint with BSP; collector may lose accreditation. |
| Civil action for damages | Possible under Art. 32 (violation of constitutional right to property) or Art. 19-21 (abuse of rights); exemplary damages if bank acted in bad faith. |
7. Compliance Checklist for Banks
Before enrollment – Deliver clear disclosure of ADA or set-off clause; secure separate signed authority.
Prior to offset/debit –
- Confirm debt is due & demandable (invoice + 90 days).
- Send pre-debit notice (e-mail/SMS or registered mail) at least 5 banking days ahead.
Execution – Post-transaction SMS/e-mail within 24 hours; reflect in next statement.
After revocation request – Stop debits within one banking day; confirm in writing.
Records retention – Keep signed mandates & notices for 5 years (AMLA / BSP record-keeping).
Audit – Annual internal audit to verify compliance with Circular 928 & 1160; report breaches to the Risk Committee within 30 days.
8. Practical Pointers for Cardholders
- Segregate funds – Keep emergency cash or payroll in a different bank to minimize offset risk.
- Read the fine print – Look for “cross-default” or “right of offset” and demand modification if needed.
- Use revocation rights – You may cancel an ADA anytime before the scheduled debit.
- Negotiate restructuring – Banks usually prefer payment arrangements to set-off because ADA failures count against their consumer-protection metrics.
- Monitor SMS/e-mails – Claim any unauthorized debit within 60 days (industry dispute window).
9. Key Take-Aways
Set-off is a statutory right founded on Civil Code compensation, but BSP insists on fairness: the debt must be delinquent, the depositor must have agreed, and notice is indispensable. Auto-debit is purely contractual and consent-driven; the customer may revoke any time. Philippine jurisprudence favors banks only when they scrupulously comply with consent and notice requirements; otherwise, customers have strong remedies before the BSP and courts.
10. Annotated Sources for Further Study
- Civil Code, Arts. 1278-1290, 1980, 1306
- RA 8791, §§55-56; RA 10870
- BSP Circulars 928 (2016), 1048 (2020), 1160 (2023); MORB §X263/1325Q
- Citibank v. Cabamongan, G.R. 146918 (2005); PNB v. Pineda, G.R. 121267 (1998); Sumitomo v. Velasco, G.R. 190289 (2022)
(All citations to Philippine primary law are in the public domain.)