Veronica Corbett named her son, Jeff Feretta, a joint account holder on her money market account. In October, Navy Federal legally removed more than $30,000 of Corbett's money from the co-owned account to pay off Feretta's delinquent home equity loan. Neither was notified in advance, they said. ()
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In early October, 79-year-old Veronica Corbett logged into her Navy Federal Credit Union money market account online and discovered that more than $30,600 was missing.
"I was in shock," Corbett said. "I immediately thought it was identity theft."
She called Navy Federal, and within a day it became clear where the money had gone: The credit union had pulled it from the account to pay off her son's delinquent home equity loan. Her son Jeff Ferretta contacted Military Times to complain about Navy Federal taking the money out of her account to pay his debt without notifying either of them.
What she and her son didn't realize was that financial institutions have the legal right to pull money from accounts to pay off delinquent debts held by any co-owner of the account when the loan and the account are with the same bank.
"Questions come up about this a lot," said Brandon Smith, director of consumer affairs for the National Credit Union Administration, the federal regulator of credit unions. "A lot of consumers are unaware of this statutory lien provision and don't take the time to read the disclosures" when they open an account or take out a loan, he said. "They say, ‘I had no idea.'"
There are exceptions, such as individual retirement accounts and custodial accounts. But if you co-own an account with an older child, for example, "the minute the kid stops paying on a credit card, they can come and get the money from your account," Smith said.
Similarly, if you open a savings account with your 10-year-old and later stop paying on a credit card, the financial institution can go into your child's account.
‘They should have called her'
After Corbett's husband, a retired Marine, died in May, she asked Ferretta to be a co-signer on her account because he's the only one of her children who lives near her. They went to a Navy Federal branch in late July and explained that he would use the account only if his mother became incapacitated and couldn't pay her bills.
Meanwhile, Ferretta said he had been trying for more than a year to get a loan modification on his first mortgage from the bank that holds it. He said the bank told him it could not help him unless he was in arrears on the loan. He also had taken out a home equity loan on the house six years ago from Navy Federal.
When he consulted an attorney about the loan modification, "he told me the bank won't talk to me unless both the first and second mortgage are in arrears," Ferretta said. So he stopped making payments on the Navy Federal home equity loan in February.
Ferretta was about $2,000 behind on his home equity loan payments. Navy Federal "should have called her and said, ‘Your son is late on his payments, what do you want us to do?'" he said. "Instead, they took more than $30,000 from her account, paid off and closed my home equity loan, and I didn't know about it, either." He didn't have $30,000 to repay his mother.
Navy Federal followed rules
"We follow the regulations on how to collect a debt. They're standard for financial institutions," said Jeanette Mack, a spokeswoman for Navy Federal. She said the credit union encourages members to learn what it means to be a co-owner of an account.
She said it is credit union policy not to discuss members' specific situations, but that Navy Federal has resolved the situation.
"The only way my mother could get her money back was for me to give them $12,000," Ferretta said. He doesn't know where that figure came from, and Navy Federal would not give details.
"I had to go out and find the money. I didn't have a choice. It's my mom's money. I had that loan for six years, and was never late until recently. I wasn't trying to hurt anybody."
Corbett said Navy Federal officials told her that she signed a paper that, among other things, granted Navy Federal the right to withdraw money from the account for a co-owner's delinquent debt.
"The lesson I've learned is not to sign anything without reading it," she said.
Those account agreements signed upfront fulfill the financial institution's regulatory requirement to notify the customer, said Cathy Mansfield, a professor at Drake University Law School. There may also be an acceleration clause, which means that if the account becomes delinquent, the entire amount is due.
In some cases, state laws affect banks' ability to take these funds to pay a delinquent debt, she said. Some allow banks to take all funds in a joint account for the debts of one account holder, even if the other account holder made all the deposits into the account.
Other states allow the bank to remove only up to the amount of the debtor's deposits into the joint account, according to the National Consumer Law Center publication "Consumer Banking and Payments Law." Federal credit unions are not governed by state law, Mansfield noted.
Read the fine print
Here's what you need to know:
• As tedious as it may be, read all disclosure documents before you sign them. Really make an effort to predict what the implications could be, and if you're making changes to an existing account, go back to the original documents for a refresher.
• Be careful about how you handle accounts, said Smith, of the National Credit Union Administration. "I would never open up a checking account with a parent and a child as co-owners," he said.
According to the National Consumer Law Center, joint accounts are an "inappropriate shortcut for holding money in trust for a child."
Yet, in most states, credit unions can open accounts for minors only if an adult manages the account on behalf of the child, said Laura Todor, consumer affairs officer for NCUA.
Age requirements also may apply; some states allow a child to open an account at age 16 without the involvement of an adult. For teaching a child independence and financial responsibility, Todor said, a prepaid debit card might be an option, allowing parents to keep informed, involved and in control.
Depending on your state's laws and your financial institution's offerings, there are other types of accounts not subject to collection of a co-owner's debts. The type of account used depends on the circumstances.
Ask your financial institution if it offers a "convenience account," where one account owner might give signature authority to someone else, who would have the ability to write checks but would not be a co-owner. Credit unions generally don't offer these accounts, Todor said.
For savings accounts for minor children, parents might consider custodial accounts under the Uniform Transfers to Minors Act, which most states have adopted, Todor said. Other options include Coverdell Education Savings Accounts and 529 College Savings Plans.
There are also better options than joint checking accounts for adult children. For example, in Corbett's case, she later found that giving her adult son check-writing privileges on her money market account wasn't even necessary because he already had power of attorney within her trust.
• If this issue could be a problem for you, don't get loans from the same bank where you hold checking or savings accounts.
"If you get behind on your car loan, they'll take it out of your bank account," Mansfield said.
If your checking and savings are with a separate financial institution, the bank or credit union would have to go to court for a judgment to be able to garnish the money.