A frozen bank account is one of the remedies available to creditors to collect an outstanding debt when you are behind on your payments. If your account is frozen, you will not be able to withdraw or transfer money from that account until the freeze is lifted. This can cause further financial hardship on top of your current debt problems since it’s now hard to pay your rent, buy groceries and pay for everyday living costs.
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Who can freeze your bank account?
For most people, three common types of creditors can freeze your accounts:
- General creditors can freeze your bank account for unpaid debts including credit card debts, bank loans, financing loans and even payday loans. Your creditor must first go to court to obtain a judgement against you, which is a piece of paper confirming that you owe them money. Once they have a judgement they can apply to the court for an order to freeze your bank account or issue a wage garnishment.
- Canada Revenue Agency can freeze your accounts without obtaining a court order. If you owe the CRA tax money and have not worked out a payment plan, or filed a consumer proposal or bankruptcy, they will often freeze your bank account to force you to deal with your outstanding tax obligation.
- If you are subject to a judgement because of a lawsuit or other court procedures, these creditors can also pursue payment by freezing your bank account.
In addition to having your account frozen, certain creditors can also seize money from your account through something called a ‘right of offset’. If you owe money to say Bank A, and you have an account at Bank A, then this bank can take the payment out of your bank account to offset any overdue payments without your consent. While you can continue to use your bank account, any new money you put in is also subject to this right of seizure.
How to clear a frozen bank account
It’s hard enough to catch up on missed debt payments, but when a creditor freezes your bank account, you find yourself without money to pay rent, groceries and other daily living expenses. So who can freeze your bank account, when and how? I’m Doug Hoyes, a Licensed Insolvency Trustee with Hoyes, Michalos & Associates. Let’s talk about frozen bank accounts and what steps to take if this happens to you. What is a frozen bank account? A frozen bank account is one of the options creditors use to collect outstanding debts. It’s not the first action they’ll take though, they start by calling you, and sending letters, and if that doesn’t get your attention, they may freeze your bank account. And once that happens you can’t take money out of your account, or make an e-transfer, or pay your bills until the freeze is lifted. Who can freeze your bank account? Well, there are several situations where someone you own money to, a creditor, can freeze your bank account. First, you can’t just go and freeze someone’s bank account. If you owe someone money and they wanted to freeze your bank account, they can’t just call up the bank and say “hey, freeze their bank account’. The bank will only let a creditor freeze your bank account if they have a court order. So, a creditor would have to take you to court, sue you, get a judgement, and then enforce that judgement by freezing your bank account. So, that’s the first case, you lose a lawsuit, and they freeze your bank account. The second case is where you owe money to a bank and you don’t pay them, and you have a bank account with money in it at the same bank. They don’t need a court order, they may decide they don’t want you as a customer anymore, so they could freeze your account. The third case, and this is the most common case I see, is where you owe money to the Canada Revenue Agency for back taxes. If you aren’t paying, they don’t need a court order, they can issue a Requirement to Pay Notice, and send it to your bank, and when your bank gets it they freeze your bank account and send the money to CRA. This is a common CRA tactic when you haven’t filed your taxes for a few years. They find that freezing your bank account is a great way to get your attention. So, to prevent CRA from freezing your bank account, file your taxes, and if possible, pay them. Do you know about your bank’s Right of Offset? I mentioned your bank, if you owe them money and they don’t want you as a customer, they can freeze your bank account, but they also have another power called the ‘right of offset’. If you owe money to Bank A and you also have an account at Bank A, then this bank can take the payment out of your bank account to offset any overdue payments without telling you because that’s the deal you agreed to many years ago when you set up your accounts with them. Well, you can continue to use your bank account, any new money you put in is also subject to this right of seizure. What are your next steps if your accounts have been frozen? Your first line of defense if you are behind on your payments is to work with your creditors to come up with a repayment plan or talk with a Licensed Insolvency Trustee about filing a consumer proposal or bankruptcy. But in the meantime, if your account is frozen or might be, we recommend that you open a new bank account at a new bank where you don’t owe any money. Notify your employer to deposit your paycheck into this new account. Move any money from your old account to your new account. Don’t tell your creditors where this new account is. Transfer only bill payments you want to continue. If a creditor doesn’t know about a new bank account, they can’t take money out of it, and that ensures that you can access your money to pay for your daily living expenses. Of course, that’s a temporary solution, eventually your creditors may find out about your new bank account, so what’s a more permanent solution? Well, if you’re unable to pay your debts and you’re worried about your bank account being frozen, talk to a Licensed Insolvency Trustee about a consumer proposal or bankruptcy. If you file for either of these options, it will stop all creditor actions, including freezing your bank account. When you meet with us at Hoyes, Michalos & Associates, and our Licensed Insolvency Trustees, we’ll help you figure out what options you can take next to improve your financial situation. For more information on frozen bank accounts, visit our website at hoyes.com.
Creditors, including the CRA, do not act to freeze your bank account until after they have sent repeated requests for collection. This will include polite letters, phone calls, and formal legal notices.
Your first line of defense if you are behind on your payments is to work with your creditors to come to some form of repayment program or talk with a Licensed Insolvency Trustee about filing a consumer proposal or bankruptcy.
While your account is frozen, we recommend you open an account at another bank. If your paycheque is electronically deposited, notify your employer right away to change your account.
Next, you may want to consider filing a consumer proposal or bankruptcy if you are unable to pay the underlying debt on your own. A Licensed Insolvency Trustee has the tools to clear a frozen bank account. When you file a consumer proposal or bankruptcy, you are granted a stay of proceedings. This stops all legal actions including things like a wage garnishment or frozen bank account.
Other common questions
Can creditors or debt collectors see your bank account balance? With one exception, no debt collectors can ask a bank or financial institution how much money you have in your account. If, however you bank at the same bank as you owe money, then yes they will be able to cross-reference and know there are funds they can seize through the right of offset.
Can payday lenders freeze my bank account? Payday lenders, like any other creditor, must first obtain a judgment before they can be granted an order to freeze your account.
Can creditors take all the money in your account? Creditors can take up to the full amount owing, which means they can take all the money in your account to satisfy the debt. They can continue to take any further funds deposited as long as the account is still frozen, and you still owe money.
Can the bank ignore an order to freeze my bank account? No. Once they receive legal notification, the bank must immediately freeze your account, and remit any required amount to your creditor, or they will face legal penalties. They can only stop when the freeze is lifted by your creditor or because they received a notice that you filed a bankruptcy or proposal.