New Bank Account: Benefits and Risks of Opening a New Bank Account Before Declaring Insolvency

What Happens To My Bank Account If I File A Consumer Proposal Or Bankruptcy?

Your bank account is an important component of your everyday life. You probably use it to receive your income and pay your bills. These things may even happen automatically, without you having to give it much thought. It’s possible that you have had the same bank account for your entire life and have never even considered changing it.

So what happens to your relationship with your financial institution in Canada if you file a Consumer Proposal or Bankruptcy with a Licensed Insolvency Trustee?

Will My Bank Even Find Out About My Filing?

The main factor that determines the impact that a Consumer Proposal or Bankruptcy filing will have on your bank account is whether or not you owe money to that same financial institution. According to the Bankruptcy and Insolvency Act, the Licensed Insolvency Trustee is required to notify your creditors of a Proposal or Bankruptcy that you have filed.

They do this by sending them documentation that allows the creditor to file a claim for their share of the proceeds available to creditors from your Proposal or Bankruptcy. Therefore, if you owe money to your bank, they will always be notified about your Bankruptcy or Consumer Proposal. This is the case even if you owe them for a secured debt that you intend to keep paying, such as a mortgage or a car loan.

Does It Matter If They Find Out?

This usually depends on whether or not you have an unsecured debt owing to them. An unsecured debt is a debt that is not attached to a specific piece of collateral, such as how a mortgage is attached to a house or a car loan is attached to a vehicle. Unsecured debts are typically the ones that you are trying to deal with by filing the Proposal or Bankruptcy, which almost always results in the creditors (including your bank) receiving less than the full amount owing. When this happens, the bank will, unsurprisingly, do what it can to minimize its loss.

One tool that the bank has at its disposal is the right of offset, sometimes called the right of set-off. This allows the bank to seize any funds that you have on deposit with them so that they can use those funds to reduce the amount of debt that you owe to them. It doesn’t matter how much is in the account — if you owe them money, it is very likely that they will take whatever you have in your chequing and/or savings account. Even if your account is in an overdraft position they will still freeze it to avoid any further advancements being taken.

In many cases, how they take the money is a bigger problem than what they take. Usually, the account is frozen, the funds are transferred out of it and the account is closed. Closing the account means that you can no longer use it — your paycheque can’t go into it and your bills can’t come out of it. If your paycheque is automatically deposited to that account, your employer may have your wages returned to them, meaning that you are without your income for the time being, and your daily bills may go unpaid.

Is There Anything That I Can Do About This?

There is not much that you can do to stop the bank from doing this. What you can do is prepare for it by opening a new bank account somewhere that you do not owe money. Once this new account is open, you should switch whatever automatic deposits and debits you have over to your new bank. After this is done, you should close your old account at the bank that you owe money to.

At that point, nothing the bank does to that account should impact your day-to-day life, because all of your transactions are going through your new, “safe”, bank account. This should be done in advance of you signing the documents with your Licensed Insolvency Trustee. This way you have time to advise your sources of income to deposit the funds into the new account and to move your bill payments over to the new account as well.

Usually it is fast and easy to open a bank account online or in person, and it sure beats being surprised by a frozen bank account. Remember not to move the payments for the bills that you are getting rid of in the Bankruptcy or the Consumer Proposal, such as your credit cards and lines of credit. They do not need to know about your new account because you will not be paying them directly any longer.

What Financial Institution Should I Switch To?

Fortunately, there is more than one financial institution in Canada, so you have plenty of options. There are the so-called “Big Five” national banks of Scotiabank, BMO, CIBC, TD Bank and Royal Bank. If you are comfortable banking primarily online, there are banks geared to that such as Simplii Financial and Tangerine (which are subsidiaries of CIBC and Scotiabank, respectively) that may have lower costs.

However, because of their links to CIBC and Scotiabank as mentioned, we would not suggest opening an account at Simplii if you owe CIBC, or opening one at Tangerine if you owe Scotiabank (the reverse also applies). Manitoba is also fortunate to have many large credit unions that are competitive alternatives to the major banks, such as Access Credit Union, Assiniboine Credit Union, Steinbach Credit Union and many others.

So which one do you choose?

Most importantly, you should choose one that you don’t owe money to as your new bank would have the same right to offset your deposits against your debts with them as your old bank did. Branch location should also be considered. Even though more and more aspects of banking can be done online and through apps, there will be occasions where a trip to a physical branch may be required, so having a branch in a somewhat convenient location is still useful.

Also, if you receive physical cheques frequently it may be helpful to open your chequing account at the same bank that these cheques are drawn from. Because your history with your new bank is probably going to be limited, they might require a hold be placed on any cheques that you deposit to make sure that the cheque won’t bounce before they allow you to withdraw the funds that you just deposited. This hold time may be shorter if the cheque that you deposit is from the same bank, because it is faster and easier for them to confirm that the funds exist in the account from which the cheque was written.

So if, for example, your employer pays you with a paper cheque and you require prompt access to this money after your payday, it would make sense to open your account at the same bank as your employer.

If you don’t owe money to many banks, you live near multiple bank branches and you are paid by direct deposit then your options are wide open. In that case it might be a good idea to check out what promotions are being offered by the banks to attract new customers. It seems like most months there is a new account offer or a similar promotion being offered by some bank. If you have to switch banks anyway, why not switch to one that is offering you something to join them?

Of course, you should also pay attention to the fees being charged on the account that you are signing up for, and the commitment required in order to qualify for the promotion. You might find that the extra fees more than exceed the benefits being offered and that you are better off signing up for a cheaper account elsewhere. Make sure that you are not paying extra for bank account “features” that you do not need.

As you can see, there are different things to consider when preparing to file a bankruptcy or a consumer proposal. Make sure that you talk to someone knowledgeable, like the Licensed Insolvency Trustees at LCTaylor, to get the full picture. Call us at 204–925–6400 or email us at questions@lctaylor.net to book a free consultation and find out how the process would work for you.

Originally published at https://lctaylor.com on March 4, 2023.