It is highly recommended to open a new bank account before filing a consumer proposal. This guide will explain why and what to consider when choosing a new bank.
What happens to your bank account in a consumer proposal?
When you file a consumer proposal, your bank can take any funds in your account and apply them to another unsecured debt you owe, such as a credit card, overdraft or loan.
This is your financial institution using the right of offset (also called right of set-off) to recover money owed.
For example, you might have a credit card and chequing account, and you’ve included this credit card debt in your proposal. In this scenario, your financial institution can take any money from the chequing account as payment toward the credit card debt.
Your bank can also freeze your account, leaving you unable to access it. This response is a knee-jerk reaction to recuperate the money owed, but it is entirely within their rights.
In most cases, they will do this without notifying you beforehand. This is a very unpleasant discovery that can leave you unable to pay your rent or buy groceries, so opening a new account stops this from happening.
What happens to my joint bank account in a consumer proposal?
A right of offset may be used on joint bank accounts to reclaim money they are owed.
Switching banks before a consumer proposal
If you owe your bank a debt included in the proposal, you must open a new account.
Switching chequing accounts can be time-consuming if you have multiple income streams and pre-authorized debits, but making the change allows you to stay in control of your money.
The benefits are simple:
- Start fresh with a new bank.
- You will not lose your money.
- There will be no accidental requests for payment from your creditors.
Choose a consumer proposal-friendly bank account
It is crucial to choose a bank that understands that you are entering into a consumer proposal.
- Try to open a basic account with low fees and simple features that allow you to withdraw cash and pay bills.
- Most banks offer a basic account: a simple account with a debit card that allows you to carry out typical banking tasks.
- You should have no debt with the new bank.
- You are not allowed to have overdraft protection on your new account.
Things to consider when opening a chequing account
Opening a new chequing account is essential to ensure you don’t lose any money.
Canada has many banks, and there is no shortage of options, but consider the following:
- Does it meet my needs for daily banking?
- Is the account opening application process simple enough?
- Will it save me money?
- Does it have low fees or charges?
- Does it have any free services?
- Does it offer the features I require?
- Are there local branches and ATMs?
- Does it offer deposit insurance?
Most importantly, choose a financial institution where you do not owe money.
Things to consider when choosing a consumer proposal bank account
Most banks require two original forms of government-issued identification, such as a valid Canadian driver’s licence, passport, birth certificate or Social Insurance Number (SIN) card.
Read the small print
Make sure you read and understand the terms and conditions before applying. Tell the new bank about your upcoming consumer proposal.
Get help with your move
Most financial institutions can help you switch accounts. They may offer a service that transfers your existing pre-authorized debits to your new account.
You cannot apply for overdraft protection on your new bank account because an overdraft is a form of credit. So, careful budgeting is required to avoid an unauthorized overdraft.
Seven steps to switch bank accounts before a consumer proposal
Here are the steps you should take if you’re looking to switch banks before filing a consumer proposal.
- Apply for a new account.
- Move your money from your old account to the new one.
- Redirect your income streams to the new account. Inform your employer and ensure all child tax benefits and support payments are paid into the new account. Your My Service Canada Account may help you do some of these tasks.
- Update your rent and utilities.
- Do not provide creditors with your new bank account information unless it is items such as your mortgage or car.
- Make sure you stop payments from your old account, or your creditors may still be able to take payments and leave you overdrawn.
- Close your old bank account, and destroy your old debit cards and cheques.
Closing an account with an overdraft
If you are in an overdraft, you cannot close an account. Make sure no more payments and charges are applied to the account and include your overdraft as a debt in your consumer proposal.
Your rights to opening a bank account
Regardless of your financial circumstances, employment status or location in Canada, you have the right to open a personal bank account under the Access to Basic Banking Services Regulations.
Banks can only refuse to open an account if:
- The bank thinks you will use the account for illegal or fraudulent purposes.
- You have undertaken illegal or fraudulent activity with financial services providers within the past seven years.
- The bank believes you provided false information when attempting to open the account.
- Your actions resulted in physical harm, harassment or abuse of bank employees.
If you need more information about your rights, visit the Financial Consumer Agency (FCAC).
Open a new bank account before filing a consumer proposal
If you have debts with your bank, switching banks before filing for a consumer proposal prevents them from seizing your funds or closing your account.
If you’re thinking about filing a consumer proposal, you should talk to a Licensed Insolvency Trustee. The meeting is free, and there is no obligation.
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