Can the bank take my money if I fall behind on my debts?
There are dozens of worries people often face when their debt starts to become unmanageable:
Should they pay toward the highest interest debt or the debt with the highest value? Is it worth missing a debt payment to make rent or afford groceries this month? Can they afford to use one form of credit to make payment on another?
These questions are difficult enough without the lingering worry your financial institution may decide to take matters into their own hands and withdraw money from your bank account without your authorization.
Wait — can they even do that?
The short answer is yes
Most banks outline terms in their agreements which allow them to apply funds from one account to an outstanding debt at the same institution. For example:
Imagine you have both a chequing account and a line of credit with ABC Bank. If you miss a payment, the bank can transfer money directly from your chequing account and apply it against the outstanding debt — up to the amount required to bring your line of credit back to good standing.
They do not have to advise you ahead of time and they do not need a court order. It’s also possible the bank could go so far as to reverse one of your regular payments (e.g., pre-authorized withdrawal for utility payments) and instead apply those funds against your bank debt.
There are limits
Absent a court order (e.g., garnishee), a bank’s ability to automatically withdraw money from your accounts is limited to debts owing to that institution and debts owing to Canada Revenue Agency. In other words, another financial institution or non-affiliated credit card provider could not call your bank and request they transfer funds to pay your outstanding debts.
It is therefore good practice to open an account at a bank where you do not owe money at the first sign of financial difficulty. Proactively transfer all your funds to these new accounts before the bank has an opportunity to make withdrawals from your account. Then, begin forming a plan to get yourself out of debt.
Look for a permanent solution
While moving your funds away from the bank you owe money to will prevent them from taking money from your account without your permission, this won’t stop them from seeking other remedies. The bank will almost certainly continue with collections calls, and eventually sell your file to a collections agency. The collections agency may choose to pursue other options, including a court order to garnish your wages — at which point, you’ll be right back at square one.
Reach out to a Licensed Insolvency Trustee to discuss your options the moment you begin feeling stressed by your debt. The sooner you engage a professional, the more strategies that may be available to you — from debt consolidation and budgeting assistance, to a potential Bankruptcy or Consumer Proposal.
MNP offers Free Confidential Consultations to all Canadian residents who are concerned about their financial situation. We’ll review your entire financial history, discuss your challenges and goals, and help you make sense of all the potential opportunities to permanently address your debt.
Follow the Trustee’s advice
If you’re considering a Bankruptcy or Consumer Proposal, the Licensed Insolvency Trustee will advise you to open a bank account at a different financial institution, as suggested above. Banks will generally receive a one-time set off against any funds still in your accounts upon notice of an insolvency. Most institutions use this opportunity to freeze the account, leaving clients without any funds going forward.
However, both Bankruptcy and Consumer Proposals also provide you with an immediate stay of proceedings against any current and future collections action. Moving funds to an institution where there are no outstanding debts will protect your remaining funds and allow you to continue paying against your living expenses while you pursue a financial fresh start.
