Can the Bank Take My Money to Clear His Loan?

If the loan was in your partner's name alone, the bank cannot take money from an account in your sole name to clear it. A bank's right of set-off — its right to take money from one account to pay off a debt on another — works only between accounts held by the same customer in the same capacity. Your money is not their money, and a death does not change that.

Where set-off does bite is on the deceased's own accounts. If your husband died with a current account in credit and a personal loan or an overdraft in debit at the same bank, the bank will very often combine the two as soon as it is told he has died. The balance the estate was expecting arrives smaller than it should be, or does not arrive at all. That is usually lawful, it usually happens without a conversation first, and it is one of the more common shocks of the first month.

Joint accounts sit in between, and they are the part worth reading slowly. Whether a bank can take money from a joint account depends almost entirely on whose debt is being cleared, and the answer given on the phone is not always the right one.

The short answer: whose money, whose debt

Every question about set-off comes down to one test. Is the person who owns the money the same person who owes the debt, in the same legal capacity? If the answer is yes, the bank can generally combine the accounts. If the answer is no, it cannot.

So the ordinary case that frightens people — a widow with her own current account, and a late husband with his own personal loan — is not a case where set-off applies at all. You are a different customer. The bank has no claim on your salary, your savings or your ISA because of a debt in his name. If a member of staff has suggested otherwise, they are wrong, and it is worth putting your objection in writing rather than leaving it on a phone call.

The case that catches people out is the opposite one, and it comes as a surprise because nobody warns them it is coming. A death is reported. Within days the current account that held their savings has been emptied into the loan account, and the family is told the estate has nothing in it. In law the bank has done something it was entitled to do. In practice nobody explained it, and the family had already promised that money to a funeral director.

What a bank's right of set-off actually is

Set-off is the right to treat two accounts held by the same customer as one. It comes partly from the general law and partly from the account terms that were signed, which is why almost every UK current account agreement contains a clause about combining accounts or using a credit balance to reduce what is owed.

Three things are worth knowing about how it is meant to be used.

• It applies to money that is due. A bank cannot normally set off against a loan that is up to date simply because it has become nervous — although a death may itself trigger a term in the loan agreement that makes the balance due.
• The money must belong to the customer beneficially. Funds a customer holds for somebody else — client money, or money held as an executor in a separate estate account — are held in a different capacity, and that ordinarily puts them outside the right.
• Banks are expected to use it fairly. Regulated firms have to treat customers fairly, and a recent bereavement is exactly the sort of circumstance in which a firm is expected to think before it acts. Fairness is not the same as a prohibition, but it gives you something to argue with.

What set-off is not is a general power to chase a household. It does not reach a spouse's earnings, a child's account, or the account of a limited company the deceased happened to run. Those are separate customers, and the wall between them holds.

Which accounts a bank can reach after a death

It helps to run through the combinations, because the answer changes completely between them.

The deceased's sole credit balance against the deceased's sole debt. Reachable. This is the standard case, and the one banks do almost automatically once a death is registered with them. The credit balance stops being spendable the moment the account is frozen, and it can then be applied to their loan, overdraft or credit card at the same institution.

The deceased's sole credit balance against a joint debt. Generally reachable. Joint borrowers are each liable for the whole balance, so the deceased owed all of it, and their own money can go towards it. Whether the bank takes it from the estate or pursues the surviving borrower instead is the bank's choice, not yours.

Your sole credit balance against the deceased's sole debt. Not reachable. Different customer, different debt.

Your sole credit balance against a debt you were also on. Reachable, and this is where people are caught. If you co-signed the loan, gave a guarantee, or were a joint holder on an overdrawn account, the debt is legally yours as much as it was theirs. The bank does not need the estate's permission and does not need to wait for probate. Check the old paperwork before assuming a loan was in one name only — a guarantee signed years ago for a business facility is easy to forget and stays alive.

A business account against a personal debt, or the reverse. Usually not reachable where a limited company is involved, because the company is a separate legal person from the director who died. Sole traders and partnerships are different: there, the individual and the business are the same legal person, so business money and personal debts can meet. If the borrowing sat inside a company, the questions are different again, and we deal with them in what happens to a bounce back loan when the director dies and in whether a surviving partner is liable for partnership debts.

One more practical point. Freezing is not set-off. When a bank is told of a death, the sole accounts are frozen and the cards stop working, which is a different thing from the money being applied to a debt. If you are wondering how far you can carry on with the day-to-day banking in the meantime, the honest answer is in our piece on using a dead parent's bank card after the death, and it is that you cannot, even for their own bills.

Joint accounts: where it gets argued

A joint current account normally passes to the surviving holder by survivorship, outside the estate and without waiting for a grant. That leads people to assume the money is untouchable. It is not automatically so, and the deciding factor is whose debt is being cleared.

If the debt is genuinely joint — a joint loan, a joint overdraft on that same account, a card you both signed for — the bank is generally entitled to apply the joint funds to it. Both of you promised to repay the whole balance, and one of you is still alive to be asked.

If the debt was in the deceased's sole name, a bank taking money from a joint account is on much weaker ground. The account terms may attempt to allow it, but money in a joint account is not obviously the deceased's alone, and pulling a sole debt out of joint funds cuts across the survivor's rights. That is a complaint worth making, and making firmly. Ask the bank to identify the specific term it relied on, to explain how the same-customer test is met, and to say what it took into account about your circumstances before it acted.

Where a business overdraft is involved, everything moves faster than families expect, because those facilities are repayable on demand and get reviewed the moment a bank hears that a key person has died. We have set that out separately in what happens when the bank withdraws a business overdraft after a death.

The money that never reaches the estate

This is the part that changes outcomes, and it is decided years before anyone dies.

Creditors of a person who has died can claim against their estate. They cannot claim against money that never becomes part of the estate. Two arrangements commonly sit outside it.

• A life policy written in trust. The sum is paid to the trustees for the named beneficiaries rather than into the estate. It does not wait for probate, it is not part of the pot the deceased's creditors are entitled to share, and it is not normally counted as part of the estate for inheritance tax. A policy left outside trust generally falls into the estate, where lenders can and do reach it.
• A discretionary pension death benefit. Most modern schemes pay a lump sum at the discretion of the trustees or scheme administrator, guided by a nomination form. Because the payment is discretionary rather than owed to the estate, it ordinarily goes to the beneficiary direct.

The practical difference in a household with debt is stark. Two families can have identical borrowing and identical cover, and one keeps the money while the other watches it go to a lender, purely because of how the policy was set up and whether a nomination form was ever completed.

Trusts are not exotic, and they are usually arranged at no extra cost when a policy is taken out. They do have to be set up correctly, and they should be looked at again after a marriage, a divorce or a new child. If this is the point at which you have realised there is nothing in place, or that a policy you do have is not in trust, you can get life insurance quotes and ask an FCA-authorised broker to look at the trust and the beneficiary wording at the same time. Nobody can promise what an insurer will accept, because that depends on underwriting, but the trust question is one that is solved with paperwork rather than money.

If money has already gone from an account

Act quickly, and put everything in writing. Verbal complaints get verbal answers and then disappear.

Ask the bank, in a single written complaint, for the exact term of the agreement it relied on, the date and amount of the transfer, which account it came from and which it went to, and what it considered about the bereavement before acting. Ask for the money to be returned while the complaint is looked at. If money has been taken from a joint account for a sole debt, say so explicitly, because that is the strongest ground you have.

A firm has up to eight weeks to give you a final response. After that, or after a final response you disagree with, you can take the complaint free of charge to the Financial Ombudsman Service, normally within six months of that response. The ombudsman decides what is fair and reasonable in the circumstances, not only what the contract permitted, which matters a great deal in bereavement cases. MoneyHelper and Citizens Advice will both help you frame it, free, and neither will sell you anything. The rules banks work to are set by the Financial Conduct Authority.

One caution. If the estate genuinely owes the money and the estate has funds, reversing a set-off only moves the payment to a different point in the process — the debt is still payable, in the proper order, out of the estate. The complaint is worth making where the money taken was not the deceased's to give, or where the bank behaved unfairly towards a bereaved customer.

What a bank will still pay from a frozen account

Frozen does not mean sealed. Even before a grant is issued, banks will normally release money from the deceased's own account for a small number of purposes, and it is worth knowing which, because families often borrow to cover costs the bank would have paid.

Most banks will settle a funeral director's invoice directly from the deceased's frozen account on production of the invoice and a death certificate — the mechanics are in our guide to how banks pay a funeral invoice from a frozen account. Where inheritance tax has to be paid before a grant can be issued, there is a specific scheme that lets banks and building societies pay HMRC direct from the deceased's account, which we cover in paying inheritance tax from a frozen bank account using form IHT423.

What a bank will not do is release money to keep other creditors quiet, or to pay a debt out of turn. Where an estate may not cover everything it owes, the order in which debts are paid is fixed, and paying the wrong creditor first can leave a personal representative personally out of pocket. If a secured lender has already taken back an asset and is chasing the difference, that particular problem is dealt with in the finance firm took the car and wants a shortfall.

Scotland and Northern Ireland

The commercial reality is the same across the UK: banks combine a customer's own accounts, and they do it soon after a death is notified. The legal machinery is not identical.

In Scotland the equivalent doctrine is usually called compensation, and it depends on the debts running between the same parties in the same capacity — the same requirement of mutuality, reached by a different route. The estate process differs too. The grant is called confirmation, it is obtained through the sheriff court, and the executor is confirmed to a specific inventory of assets. In Northern Ireland the grant process and parts of the succession rules differ again from England and Wales, although the banking relationship itself works much the same way.

Wherever you live, a bank's obligation to treat you fairly comes from UK-wide regulation, and the ombudsman covers the whole of the UK. The rest of this topic — which debts die with a person, which follow the estate, and which land on the living — is collected in our guide to debt, credit and finance after a death.

Frequently asked questions

Can a bank take money from my sole account to clear my partner's loan?

No. Set-off applies between accounts held by the same customer in the same capacity, so a bank cannot use your own money to pay somebody else's sole debt. The position is different where you were a joint borrower on that loan, or signed as a guarantor — there the debt is legally yours as well, and your money can be reached.

Can it take money from our joint account?

Where the debt is genuinely joint, a bank can generally apply funds in a joint account towards it. Using a joint account to clear one holder's sole debt is far harder to justify, and lenders are expected to treat a recent bereavement sympathetically. Question anything that has been taken, in writing, and ask which term of the agreement was relied on.

Which money is safe from a lender after a death?

Money that never forms part of the estate. A death benefit paid under a policy written in trust, or a discretionary pension lump sum paid to a nominated beneficiary, generally goes straight to that person and is out of the reach of the deceased's creditors. Money paid into the estate is not protected, and has to be used to settle what is owed.