I am thinking about filing a consumer proposal or bankruptcy and I was just told I need a new bank account. Why do I need to switch banks? I’ve been dealing with them a long time and love my bank. It’s convenient and everything is set up the way I like it.
Why Do You Need A New Bank Account?
One of the first things we ask when you begin exploring the option of filing bankruptcy or a consumer proposal is if you owe money where you bank. If the answer is yes, then we strongly recommend that you open a new bank account, with a bank you don’t owe any money to. Why do we tell you to do that?
The reason is something called the lender’s right of offset which allows banks and credit unions the right to offset your debt by automatically, at their discretion, withdrawing money from other accounts you have on deposit with them.
When the bank receives notice of your consumer proposal, or bankruptcy, they have the right to offset the money that was in your bank account as of the day you filed against any debt you owe them. If you have a loan, credit card or line of credit with the same bank you have a bank account with, they have the right to do this. They can also put a freeze on your money so you can’t take any money out of your bank account. Do you still love your bank now?
There is a stay of proceedings when you file the consumer proposal or bankruptcy (meaning the bank can’t take any future funds), but in the meantime you don’t have use of your account until the bank takes the freeze off. This can take days or even weeks.
What if I bank somewhere else?
Even if you don’t bank where you owe money, it may still be best to open a new bank account. If you have set up all of your creditor payments on pre-authorized payment or post-dated cheques it will be quite expensive and time consuming to put stop payments on all of the payments. Talk to your bank about the best way to deal with all of the payments. They might suggest stop payments, or they might suggest that they give you another bank account number.
Switching bank accounts is a lot of work. It is quite common today to have your paycheque or benefit cheques directly deposited into your bank account and to have your car payments, insurance, and utilities set up on pre-authorized payment. It takes time to have everything switched over, but considering that is your cash that is a risk, it is time well spent.
What if I have a mortgage where I bank?
If that is the only debt you have with the bank, they will still get notified about your consumer proposal, those are the rules. As long as you are current on your payments your mortgage lender can’t cancel or change your mortgage terms just because you filed a consumer proposal or bankruptcy however you may still find that the bank’s computer has put a freeze on your bank account. Errors happen.
You can have a mortgage payment come out of whatever bank account you want, it doesn’t have to be at an account where your mortgage is held. Even if this is the only debt you have with the bank, it is still a good idea to go to a different bank. It just makes things cleaner & easier and avoids potential problems down the road.
What can happen if I don’t open a new bank account?
I explain this with a true life example. Fred (not his real name) filed a consumer proposal in our office because he needed help with payday loans. Prior to his proposal Fred didn’t owe any money where he banked however he did have a pre-authorized payment plan set up with for a payday loan that was included in his proposal. Against our advice, he did not get a new bank account. Fred put a stop payment (or at least thought he did) with his bank for the pay day loan. Unfortunately the pay day loan company put 3 more charges through his bank. The payday loan company claimed that since it took time to get notice of the consumer proposal, they can do this. They are wrong but now Fred has to go back to his bank and find out why the payments cleared. We spoke with the pay day loan company, sent multiple notices and we listened to a local branch versus head office blame game. Since Fred didn’t owe any money to his bank, an easy solution would have been to have his bank give him a new bank account number. If he had done that, the payday loan company would not have been able to take his money.
Because Fred didn’t get a new bank account, he is now having to deal with the bank and the payday loan company to get his money back. Fred’s only other option may now be to make a motion to court to force the payday loan company to give him his money back.
Am I even allowed to open a new bank account if I am going to file a consumer proposal?
Under the Canadian Bank Act, you have the right to open a bank account http://www.fcac-acfc.gc.ca/Eng/resources/publications/yourRights/Pages/OPENINGA-Ouvertur.aspx even if you are bankrupt or in a proposal.
To summarize: Get a new bank account! It will be worth the effort.
At Hoyes Michalos we don’t just sign you up for a bankruptcy or proposal. We want to make sure the process is successful for you which is why we give clients so much information, like how to switch their bank account, ahead of time. If you need debt help, contact us today for good debt advice from our friendly, caring professionals.