Whenever I meet with someone to discuss filing bankruptcy or consumer proposal one of the questions I ask is, “do you bank where you owe money?”. If the answer is yes, I strongly advise that they open a new bank account before going bankrupt or filing a consumer proposal, at a bank where they have never done business or had credit card debt.
Let me make this clear, if you bank at a financial institution where you owe money, there is a really good chance that they will freeze your bank account when they get the bankruptcy or consumer proposal papers.
Once your bank account is frozen your car payment and rent cheque will bounce.
I consider it so important to open a new chequing account that we provide a tip sheet on how to open a new account and why this is important.
Click to read a printable pdf version of our fact sheet below.
Yes, this is a lot of work, but consider that the bank can take money from your account if you don’t make the switch. You need to make sure that they can’t put through charges to your bank account after your bankruptcy or consumer proposal starts. This is money you need for your rent, utilities and groceries; you don’t want to put that at risk.
Step 1: Set up a new account with a new financial institution.
Step 2: Withdraw any positive balance from your old bank account and deposit them into the new account.
Step 3: Change your income to your new account immediately. This includes work income, Child Tax Benefits, other government payments, support payments etc.
Step 4: DO NOT advise any creditor of your new account number, except mortgage or car payments you will be continuing to pay.
Step 5: Change any pre-authorized payments for utilities, rent and insurance payments that will continue after filing. If the payment can’t be changed immediately, arrange to pay by cash or money order. Contact the place where you first arranged your pre-authorized payments: either online, with your bank or the appropriate creditor.
Step 6: Stop any payments from your old account. Some financial institutions will consider any attempts to take funds from the old account after the date of your bankruptcy or proposal to be a debt they can collect from you because it happened after you filed bankruptcy.
Step 7: Close your old bank account. If your old account is in overdraft you will not be able to close it. Reduce the overdraft limit if possible.
If you bank where you have a credit card or other debt, it is very easy for the bank to take the payment from your account if you don’t make the payment on time. Even another bank where you owe money can debit your account if you have given them permission to do so.
Opening a new account may be a hassle because you have many expenses automated for your convenience. It will take time to contact everyone to switch over all of the expenses in your account, but the change will let you keep better control of your money.
Yes, I understand you really like your bank and have been there for years, but if someone at the bank forgets to tell the computer not to take money from your bank account, bankruptcy or a consumer proposal will not stop it since the computer could debit your account without your knowledge. We do notify your creditors promptly about your bankruptcy or proposal, but it will take time for the notifications to reach the right people and for their changes to take effect in the banking computer systems. Once such a non-permitted transaction is discovered, your bankruptcy trustee can apply to court to get the money back, but that may take days or even weeks. In the meantime, your rent cheque has bounced and you can’t buy groceries.
But how do I close my account if I am in overdraft?
You can’t. You just have to make sure that no more charges go through that account. The overdraft becomes a debt that is included in your bankruptcy or consumer proposal.
Since overdraft is a form of credit, you can’t have overdraft protection on your new bank account. To ensure that you don’t overdraw your balance after bankruptcy, create a budget that will help to ensure that you are able to meet all of your bills going forward.
To make the point clear- Protect yourself, get a new bank account!!
Which bank should I pick?
Here’s how you pick a new bank:
- As discussed above, it has to be a bank where you don’t owe any money.
- If you get paid by cheque, because you are a new customer, your new bank will likely put a 10 day hold on all deposits. (You may be able to reduce or eliminate the hold period by making the deposit with a teller, and not at the machine). If possible, bank at the same bank your employer uses, because it’s easier for the bank teller to instantly clear your cheque (without a hold period), because they can see that there is enough money in your employer’s bank account. After you have deposited a few paycheques you can ask the bank to remove the hold on your deposits.
- If you get paid electronically (most people do), you can pick a “virtual” bank like Tangerine or Simplii Financial. They don’t have branches, but most of their services are free, so you can minimize service charges by using an on-line bank.
NOTE: We don’t endorse or recommend any bank, so ask about services and service charges before you decide on which bank to use.
If you are considering a consumer proposal or bankruptcy as a way to eliminate your debt, contact us to book a free, no-obligation consultation at your nearest Hoyes Michalos location. We’ll review your debts and your banking arrangements and help you make a plan that will eliminate your debt.