Six Reasons Why You Should Switch Banks When Filing a Proposal or Bankruptcy

This is part one in a six-part series on the rationale behind switching banks prior to filing for bankruptcy or kicking off a consumer proposal. Keep an eye out for subsequent blog posts in the coming weeks.

Reason #1 - The Rule of Set-off

Let’s say that you owe the bank for an overdraft, unsecured loan, or credit card.

Let’s also say that they owe you money because you have a positive balance in your bank account.

We’ll use a proposal as an example, but this scenario applies to bankruptcy, also.

The set-off rule states that on the day your proposal or bankruptcy is filed, mutual debts are set off against one another. The bank takes the funds from your bank account and sets off this amount against your debt owing to them.

One simple solution is to make sure there are no funds in your bank account when your proposal is registered. Our office sends a notice to all your creditors, including your bank, when your proposal is registered. The notice includes a stay of proceedings stating that your creditors may not collect on any unsecured debt.

This works in theory, but here’s what can possibly happen.

First, you withdraw all the funds from your bank account, and the trustee registers your proposal. Next week, your employer deposits your paycheque automatically into your bank account.

Since your account had a zero balance on the registration date, the bank is not entitled to take funds from your paycheque.

However, the bank may not be aware of your proposal yet, even though the trustee immediately sent them notice of the registration.

The banks typically use a third-party agent to accept and input proposals and bankruptcy information. This input is a manual process at the agent’s end, and they receive hundreds of registrations daily. The agent may not input your proposal information for weeks.

As a result, the bank doesn’t know about your filing, and they don’t know the funds shouldn’t be taken for overdue payments. The bank takes the funds from your bank account when funds become available – when you put money back into your account, when your employer deposits your next paycheque, or the government deposits your pension cheque.

When I get a phone call from a debtor on a Friday night, I can almost always guess correctly it’s from someone who filed their proposal or bankruptcy in the last couple of weeks and the bank incorrectly exercised a set-off, leaving the debtor with no funds, or limited funds, in their bank account.

If the rent comes out the next day, your vehicle payment or mortgage is on a Friday, and if the car insurance comes out next week, these automatic withdrawals may bounce due to non-sufficient funds.

Worse, your bank may think there is still an overdue debt, and they pull more funds out when your employer deposits your next paycheque.

These scenarios would entail that you likely spend a lot of time on the phone requesting your bank return the funds to you.

The best way to avoid all these scenarios is by switching your financial institution before filing your proposal or bankruptcy.

If you don’t owe any money to your bank, there are still other reasons you should switch banks. Please contact your local MNP Licensed Insolvency Trustees and read the other upcoming blog entries in this series for reasons to switch banks.

Thank you,

Dean Prentice

Stay tuned for other blogs in this series:

  • The bank keeps taking payments after they are informed not to take payments
  • A creditor does not cancel the automatic payment
  • You co-signed or guaranteed a loan for someone else
  • Using overdraft after filing
  • A judgment is registered against your account