Insolvent Debtors Should Change Banks -Here’s Why

If you are considering filing for bankruptcy or a consumer proposal due to insolvency, we generally suggest at C.E. Craig & Associates Inc., that debtors move their bank accounts to a difference institution.  Changing accounts is not mandatory but we find that it is often beneficial to help manage the transition smoothly and provide some comfort that there will be sufficient funds to pay your ongoing expenses.  

Why Change Your Bank Account?

1. Protect Your Funds from Creditors:
   • Creditors associated with your current bank can directly withdraw funds if you miss payments, using the “right of set-off.”
   • For instance, if you have debts with TD Bank (e.g., TD Visa or TD Line of Credit) and also hold your main account with TD, the bank can withdraw funds to cover missed payments.
     
2. Avoid Unnecessary Payments:
   • Once you decide to file for bankruptcy or a consumer proposal, further payments to creditors are not required and are considered a waste of money.  
   • Once you understand that you are insolvency, you should not incur or increase your debt – start trying to live on the finds your bring in each period.
     
3. Prevent Unauthorized Withdrawals:
   • After stopping payments to creditors, they may attempt to withdraw funds directly from your account if it’s within the same financial institution.
   • Once your payments stops, creditors will being to contact your to ask for payments – after a few months of nonpayment, creditors may also being legal collection actions against you

Understanding the Right of Set-Off

• Definition and Scope:
  • Under Canadian law, the right of set-off allows banks to transfer funds from your account to cover unpaid debts you owe to the same bank.
  • This means that if you have both a debt and a deposit account with the same financial institution, the bank can use funds from your deposit account to settle the outstanding debt without requiring your consent.
    
• Implications for Debtors:
  • If you are insolvent and stop making payments on your debts, your bank can utilize the right of set-off to recover missed payments directly from your account.
  • This right is particularly relevant if you have both borrowing products (e.g., credit cards, loans) and deposit accounts with the same bank.

Steps to Change Your Bank Account

1. Open a New Bank Account:
   • Choose a bank or financial institution where you do not have any existing debts.
   • Ensure the new account does not have any automatic withdrawals or post-dated cheques linked to previous debts.
     
2. Redirect Income and Deposits:
   • Provide your new bank account details to your employer, pension provider, and the Canada Revenue Agency (CRA) for tax refunds.
   • Update information with any other sources of regular deposits.
     
3. Notify Ongoing Service Providers:
   • Inform companies and creditors of your new bank details, especially those for payments that will continue post-assignment, such as:
     • Car loan payments (if retaining the vehicle)
     • Mortgage payments
     • Rent/landlord payments
     • Cell phone bills
     • Utility bills (e.g., hydro)
       
4. Stop Payments from Old Accounts:
   • Ensure that no further payments are made from your old account to avoid unauthorized withdrawals.
   • Monitor the old account until all transitions are complete.

Legal Protections Post-Filing

• Stay of Proceedings:
  • Upon filing for bankruptcy or a consumer proposal, a legal stay of proceedings comes into effect, preventing creditors from taking further action against you.
  • This stay includes prohibiting creditors from withdrawing funds from your accounts.
    
• Potential Delays:
  • There might be a delay in the stay of proceedings being communicated to all branches of your bank. During this time, creditors may still attempt unauthorized withdrawals.
  • In such cases, your trustee can help retrieve improperly withdrawn funds, although this process can take time and might impact your immediate cash flow.

CRA changing bank account information

If you are receiving deposits from the Canada Revenue Agency (i.e. CPP, OAS, GIC, Child Benefit) you will need to update CRA as soon as you can. They can take up to 30 days to change their deposit information.  To update your banking information with CRA, call 1-800-959-8281. You will need your:

1. Social insurance number
2. Full name and current address, including postal code
3. Date of birth
4. Most recent income tax and benefit return and information about the most recent payments you received from the Canada Revenue Agency
5. New banking information: three-digit financial institution number, five-digit transit number, and your account number

Conclusion

Switching your bank account before filing for bankruptcy or a consumer proposal is a prudent step to safeguard your funds and ensure a smooth transition during insolvency proceedings. Understanding the bank’s right of set-off and taking proactive measures can help you protect your earnings and avoid complications from creditors accessing your existing accounts. 

We are here to assist, with offices in Victoria, Duncan, Langford, Nanaimo and Surrey.  

C.E. Craig & Associates Inc