Overview

“Bank set-off” (often called offset or compensation) is the practice of a bank applying money in a deposit account to pay a borrower’s overdue or due debt to the same bank, without going to court. In the Philippine setting, this sits at the intersection of:

the Civil Code rules on compensation (set-off),
the legal nature of bank deposits (a bank deposit is generally treated as a loan by the depositor to the bank),
the deposit account contract / terms and conditions, and
ownership rules for joint accounts (and, sometimes, family property regimes).

The hardest questions usually come up with joint accounts: If only one joint depositor owes the bank, can the bank take money from the joint account? The careful answer is:

Usually, a bank can set off only what legally belongs to the debtor-depositor (often the debtor’s share), unless the non-debtor joint depositor has clearly agreed to broader set-off rights or is also liable for the debt (e.g., co-maker, guarantor, or solidary debtor), or the debt is legally chargeable to the property represented by the joint deposit (e.g., certain conjugal obligations).

This article explains the doctrine, the requirements, and the practical outcomes in common scenarios.

1) What “Set-Off” Means in Philippine Law

A. Set-off is “compensation” under the Civil Code

In Philippine civil law, compensation happens when two persons are mutually debtor and creditor of each other. When the legal requirements are met, obligations may be extinguished to the extent of the amounts that offset.

There are different types:

Legal compensation – happens by operation of law once the requirements exist.
Conventional compensation – happens because the parties agree to offset even if some legal requirements are missing.
Judicial compensation – happens through court action.
Facultative compensation – one party may choose to offset under special situations.

Bank set-off typically relies on legal compensation (and often also contractual clauses that reinforce the bank’s right).

B. Set-off vs. garnishment: not the same

Set-off is the bank applying funds it owes the depositor against what the depositor owes the bank (an internal debtor–creditor adjustment).
Garnishment is a court process where a third party creditor attaches a debtor’s bank account.

Set-off is not a substitute for garnishment; it’s an internal remedy available only when the bank itself is both creditor and debtor in the required sense.

2) Why Banks Can Even Do Set-Off: The Nature of a Bank Deposit

A common misconception is: “My money is in the bank; they’re just keeping it for me.” In legal characterization, a typical bank deposit (especially savings/current) is generally treated as:

The depositor becomes the bank’s creditor (the bank owes the depositor the balance),
The bank becomes the depositor’s debtor (it must return equivalent funds on demand subject to account rules).

That debtor–creditor relationship is why set-off can conceptually work: if the depositor also owes the bank money (loan, credit card, overdraft), the bank may claim mutual debts exist.

3) The Core Requirements for Legal Compensation (Set-Off)

Legal compensation generally requires mutuality and other conditions. In bank situations, these conditions often decide whether the offset is valid:

A. Mutuality: each party must be principal debtor and principal creditor of the other

This is the big one. The bank must be the depositor’s debtor, and the depositor must be the bank’s debtor, in their own right and in the same capacity.

Implications:

If the account is held in trust or in a fiduciary capacity, mutuality may fail.
If the debt belongs to only one joint depositor, mutuality is complicated (more on this below).

B. Both obligations must be due

A bank generally cannot legally compensate against an obligation that is not yet due, unless:

there is acceleration under the loan contract (validly triggered), or
there is conventional compensation (a set-off clause allowing it even before due), though enforceability can still be tested for fairness/clarity and the specific facts.

C. Both must be liquidated and demandable

The amount must be determinate (or at least readily determinable under the contract). Banks often run into risk when:

the borrower disputes the amount,
the “debt” is only a claim for damages not yet fixed,
the bank is applying charges that are not clearly authorized.

D. Debts must be in the same kind (usually money)

Deposits and loans are money obligations, so this is usually satisfied.

E. No legal or contractual restriction defeating compensation

Examples (fact-dependent) include:

funds subject to a valid third-party claim or encumbrance,
accounts designated for a special purpose that changes capacity,
arrangements where the bank had notice that the funds belong beneficially to someone else.

4) Contractual Set-Off Clauses: The “Extra Muscle” Banks Use

Most Philippine bank account opening documents and loan/credit card agreements include some form of:

Right of set-off / compensation
Lien / right to hold funds
Authority to debit accounts
Cross-default / acceleration provisions

These clauses matter because even if strict legal compensation is arguable, the bank may claim conventional compensation: “You agreed we can offset.”

But two realities remain:

A contract cannot generally bind a non-party. If a joint depositor never agreed to allow the bank to take their share to pay someone else’s separate debt, the bank’s reach is limited.
Clarity and consent are crucial. Courts scrutinize whether the account holder actually consented and whether the clause is clear enough to cover joint accounts, third-party funds, or pre-due offsets.

5) Joint Accounts in the Philippines: Authority to Withdraw vs. Ownership

A. Different joint account modes

Banks commonly offer joint accounts such as:

“AND” account – both/all must sign to withdraw.
“OR” / “AND/OR” account – any one can withdraw.
Joint with survivorship features (contractual survivorship terms).
Accounts that are joint in name but may be funded by one party.

B. Operational authority is not the same as ownership

A key point: an “OR” account lets either depositor withdraw, but that does not automatically mean:

each depositor owns 100% of the funds; or
the bank can treat the entire balance as belonging to any one depositor for all purposes.

Authority to withdraw is about payment instructions to the bank. Ownership is about who is legally entitled to the funds as between the depositors (and against third parties).

When set-off is involved, the bank is effectively asserting: “This money is yours (debtor’s) so we can apply it to your debt.” That’s an ownership-sensitive claim.

6) So Can a Bank Debit a Joint Account for One Depositor’s Debt?

General Rule (Practical Baseline)

If only one joint depositor owes the bank, the bank’s safest legal position is:

Set-off should be limited to the debtor-depositor’s share in the joint account, not the entire balance, unless a valid basis exists to treat the full balance as available for that depositor’s debt.

Because legal compensation depends on mutuality: the bank’s debt (the deposit) is owed to both depositors, but the bank’s credit (the loan) is against only one depositor. Mutuality is not perfect for the non-debtor’s portion.

But what is “the debtor’s share”?

Unless there is proof otherwise, joint ownership in many contexts is commonly treated pro-indiviso, and in disputes it may be presumed (often practically, though fact-specific) that each has an equal share as between them—but this can be rebutted by evidence (who funded it, agreements, etc.).

Banks, however, are not always positioned to adjudicate beneficial ownership. This is why joint-account set-off is risky for banks unless contracts and facts are strong.

7) Situations Where Set-Off Against the Entire Joint Balance Is More Defensible

A bank may have a stronger argument to debit more than the debtor’s presumed share when:

A. The non-debtor joint depositor is also liable for the debt

Examples:

They are a co-maker or co-borrower.
They signed as a solidary debtor (expressly stated).
They executed a guaranty/suretyship that effectively makes them liable (especially surety).

If both are liable, mutuality improves because the bank’s claim is also against both.

B. The joint depositor expressly agreed to broad set-off rights

This could happen if:

the account opening agreement clearly states that any and all funds in the joint account may be used to satisfy any of the obligations of any account holder, and
the non-debtor joint depositor knowingly signed and accepted those terms.

Even then, enforceability can turn on clarity, fairness, and whether the bank’s implementation was consistent with the clause.

C. The deposit is actually owned by the debtor (name-lending situation)

If evidence shows the “non-debtor” is only a nominal co-holder and the beneficial owner is the debtor (e.g., the other party admits it, or documentation strongly supports it), then applying the funds to the debtor’s debt aligns with ownership.

D. The debt is chargeable to the property represented by the deposit under family property rules

If the joint account is a spouses’ account and the debt is a conjugal/community obligation (fact-intensive), the bank may argue it can apply conjugal funds.

However, this is one of the most litigated areas in principle because:

not all debts of one spouse bind the community/conjugal partnership,
the bank must show the debt is of the kind chargeable to that partnership,
and the account may contain exclusive funds.

8) Situations Where Set-Off Against a Joint Account Is Weak or Likely Improper

A. The account is in a fiduciary capacity (trust/escrow/ITF)

If the account is clearly held for another person’s benefit, the depositor’s “capacity” is not purely personal, which can defeat mutuality. Banks should not offset fiduciary funds for a trustee’s personal debt.

B. The non-debtor can show the funds are exclusively theirs

Example: a parent opens a joint “OR” account with a child for convenience, but all funds are the parent’s and can be proven. If the child owes the bank, offsetting the parent’s money is highly contestable.

C. The debt is not yet due, not liquidated, or is disputed in a way that makes it unliquidated

If the amount is not determinable or is subject to legitimate dispute, set-off becomes legally riskier.

D. The bank had notice of third-party claims or special purpose restrictions

If the bank knew the funds were earmarked, held for payroll, or subject to a separate arrangement, the “same capacity” requirement can be affected (again, very fact-specific).

9) The “Joint OR Account” Trap: Why Many People Are Surprised

A common real-world pattern:

Two people open a joint “OR” account so either can withdraw.
One person takes a loan from the same bank.
The borrower defaults.
The bank debits the joint account.

Why this happens:

Operationally, banks treat “OR” accounts as payable to either.
Contractually, banks may include broad set-off language.
Practically, banks may assume each holder has sufficient connection to the funds.

Why it may still be challengeable:

The other depositor may be a true co-owner and not liable for the debt.
Set-off requires mutuality; joint ownership complicates that.

Result: disputes often revolve around what the account agreement really says and who truly owns the funds.

10) Notice, Due Process, and Consumer Protection (Practical Expectations)

Set-off is not a court process, so the “due process” people expect in lawsuits doesn’t apply the same way. But banks are still expected to act:

in good faith,
consistent with contract terms,
with correct accounting, and
with fair dealing.

Many banks provide notice after set-off, some provide notice before, depending on contract and internal policies. Even when prior notice is not strictly required by contract, lack of notice can aggravate claims of bad faith if the offset was legally questionable or excessive.

11) Remedies if a Bank Debits a Joint Account Improperly

If a non-debtor joint depositor believes the bank wrongfully offset their funds, common avenues are:

A. Internal bank dispute / demand letter

Request the legal basis and contractual clause relied on.
Ask for account documents, transaction history, loan statement, and computation.

B. Complaint to the BSP consumer assistance channels

This is often used for resolution and documentation, especially where the issue is fairness, disclosure, or wrongful debiting.

C. Civil action (recovery of sum of money, damages)

Potential claims depend on facts:

Breach of contract (wrongful debit contrary to account terms),
Unjust enrichment (bank benefited at another’s expense),
Damages under the Civil Code if bad faith is proven.

Moral and exemplary damages are not automatic; they generally require a showing of bad faith, malice, or wanton conduct (again, fact-intensive).

D. Provisional remedies (rarely straightforward)

If funds are urgently needed and there’s a strong legal basis, counsel may consider urgent court relief. But success depends heavily on documentary proof and the posture of the dispute.

12) Practical Guidance: How to Reduce Risk

If you are opening a joint account

Ask for and read the set-off / compensation clause.
Clarify whether the bank treats joint account holders as allowing set-off for either holder’s separate debts.
Consider using an “AND” account (with both signatures required) if the goal is control—though note this addresses withdrawal authority more than ownership, and does not automatically eliminate set-off risk if the contract is broad.
If the account is for a special purpose (e.g., funds for a minor, payroll, escrow), insist on proper account structuring and labeling.

If you are the non-debtor co-holder

Keep proof of funding: pay slips, remittance records, deposit slips, transfer confirmations.
Avoid mixing funds if you want to preserve a clear claim that the money is yours exclusively.

If you are the debtor

Expect that banks will look for set-off opportunities across accounts linked to you.
If you share accounts, assume your default can affect those balances unless clearly separated and structured.

13) Quick Scenario Matrix (Philippine Context)

Scenario 1: Joint “OR” account; only A owes the bank; funds contributed equally

Likely defensible set-off: up to A’s share.
Risky/contestable: taking B’s share unless B consented or is liable.

Scenario 2: Joint “OR” account; only A owes; B can prove all funds are B’s salary

Set-off is highly contestable if it sweeps B’s funds.

Scenario 3: Joint account between spouses; husband owes; debt used for family needs (fact-specific)

Bank may argue the debt is chargeable to conjugal/community funds.
Still contestable if the debt is personal or the funds are exclusive.

Scenario 4: Joint account; both signed as co-borrowers / solidary debtors

Set-off against the whole balance is more defensible, subject to due/liquidated requirements.

Scenario 5: Account is “in trust for” a child; parent owes bank

Set-off is typically weak if the account is truly fiduciary/special purpose and documented as such.

14) What to Look for in the Documents (Often निर्णायक)

If a dispute arises, outcomes usually depend on paperwork:

Account opening forms and T&Cs
- Is there a set-off clause?
- Does it mention “any account,” “joint account,” “any funds of any account holder,” etc.?
Signature cards
- Who is the depositor? What is the account type?
Loan / credit card agreement
- Set-off authority, cross-default, acceleration, events of default.
Proof of funding
- Who actually deposited the money?
Bank notices
- Demand letters, default notices, computation sheets.
Account titling
- Joint, AND/OR, ITF, escrow, payroll tagging, etc.

15) Bottom Line

Yes, Philippine banks may have a right of set-off, because bank deposits are generally treated as debts the bank owes the depositor, which can be offset against what the depositor owes the bank when the legal requirements of compensation are met and/or when contractually authorized.

But with joint accounts, the bank’s right is not automatically “all money in the account.” The key constraints are:

Mutuality / same capacity (the bank’s debtor-creditor relationship is with the joint depositors collectively, while the loan may be owed by only one),
Ownership realities (who actually owns the funds),
Contractual consent (did the non-debtor joint holder agree to broad set-off),
Whether the non-debtor is also liable (co-borrower/solidary/guarantor), and
Whether the debt is due, liquidated, and demandable.

If you want, I can also draft:

a demand letter template to dispute an offset from a joint account, or
a checklist of arguments and documents for either side (bank vs. depositor), tailored to a specific fact pattern you provide.