Reason #2 – The bank keeps taking funds from your account after filing
In the first installment of this series, we wrote about your bank taking funds from your bank account because they weren’t aware of your bankruptcy or proposal filing. In this installment, we’ll discuss why you should close your account because the bankis awareof your filing, and they continue to take payments from your account.
Here are the top three reasons banks continue to take payments:
#1 – You have a joint bank account
It often happens when you file bankruptcy or make a proposal, and your spouse does not file. Your spouse is not required to file an insolvency along with you. They may have some debt, but it’s not something with which they need help.
Under bankruptcy and proposal law, your spouse is not liable for your debts simply because you are married or common-law partners. Your creditors cannot pursue your partner, and your partner cannot be made liable for the debt after you file.
This is, however, different under family law and separation agreements. It’s a more tangled topic which we won’t try to unravel here.
When you open a joint bank account, both you and the other account holder (usually your partner, but maybe a parent or child) agree to be liable for the entire overdraft. The bank doesn’t split the debt in half and make each of you liable for 50 percent of it. Instead, you’re each liable for the full amount of the overdraft, and the bank may collect this amount from either of you.
Your bankruptcy or proposal protects only you from creditors. It doesn’t stop a bank from collecting the debt from the joint account holder. The money in the bank account is considered your partner’s funds as much as your own. So, the bank is allowed to collect the overdraft from your partner.
Be aware. Some banks (although it happens more with credit unions) may also immediately stop overdraft and line of credit privileges associated with a joint account, even when your partner plans on keeping the account active and making the payments over time.
The bank’s view is that the other party got the overdraft and line of credit lending privileges based on the joint income from both of you when you opened the account. Since it no longer believes you have the capacity to fund the account, the bank withdraws the privileges from the other account holder.
This action causes problems if your partner relies on the overdraft privileges, or the bank converts the line of credit to a demand loan. Your partner must make minimum monthly loan payments to pay off the overdraft or line of credit. This unexpected expense crimps your family’s ability to pay normal living expenses.
Tip: Before making your proposal or filing bankruptcy, you and the joint account holder should open separate bank accounts. Your partner may open their account at the same financial institution and apply for overdraft or a line of credit, but we recommend you switch banks.
#2 – The bank keeps taking funds from your account after filing
This happened recently to a person who filed a proposal. We’ll call him Jack.
Jack owed no debt to his bank, but he did have a payday loan taking automatic payments from his chequing account. Jack opened a new chequing account at the same bank thinking his creditors could only take payments from the other account which no longer had any funds in it. We recommended he close the old account, but he insisted on keeping it open for a while.
The loan company attempted an automatic withdrawal from the original account (a week after we notified them of the proposal). The good folks at the bank saw the payment was going to be returned for non-sufficient funds. They figured the loan company hadn’t received Jack’s new account information, so they tried to be helpful and allowed the payment to come out of Jack’s new account. This withdrawal drained Jack’s new account of all his funds.
Jack’s rent cheque bounced, he missed his vehicle insurance payment, and had no funds to live on. You can imagine the stress and frustration Jack experienced. It took almost two weeks for the bank to fix their mistake.
Tip: Don’t think banking at your old bank is safe even when you don’t owe them. Switch your account before filing and close your old account.
Question: How do I close my old bank account if I’m in overdraft?
Answer: You don’t
You can’t close an account in overdraft until the balance is brought up to zero. If you have an overdraft balance when you make your proposal or file bankruptcy, include the overdraft in your filing as one of your liabilities.
#3 – Your debt to your bank is a secured loan
A secured loan is a debt for which a creditor took an asset you own as collateral. If you don’t make your loan payment, the creditor is allowed to seize the asset. Most secured debts are car and truck loans, recreational vehicle loans, and mortgages on a property.
Bankruptcy and proposals do not eliminate or alter secured loans. If you want to keep an asset that has a lien or mortgage registered against it, you need to keep making your payment according to the terms of your loan. You keep your car by keeping your payments going.
In most proposals and bankruptcies, people want to retain their assets, so they want to keep paying the bank for the mortgage or vehicle loan. The banks know most people keep paying their secured loans, so when they see a bankruptcy or proposal filed, they assume the secured debts will continue to be paid. They continue to take the automatic withdrawals from your account.
If you do not want to keep your vehicle, or house, or other secured asset, you must inform the bank you will not keep the asset and you will not make any more payments.
MNP offices in the interior and Northern British Columbia write to creditors immediately after you file bankruptcy or make a proposal explaining you do not intend to continue your secured loan payments, and that the bank should immediately cease all automatic withdrawals.
In your proposal, we detail in writing if you will or will not continue payments on secured debts. In bankruptcy, the trustee informs creditors immediately to stop taking secured loan payments if you are not going to keep paying to retain the asset.
These three actions make it clear to creditors what your intentions are, and it makes it easier to stop funds from being taken, or to recover funds if the bank continues taking automatic withdrawal payments after you file.
Tip: Before you file, decide if you will continue your secured loan payments. If you make payments afterwards, the creditor may claim you re-affirmed your commitment to paying the loan. They may continue to take payments or take legal action outside the insolvency process to collect from you.
Thanks for reading this installment. In the next installment, we’ll explore why using a bank account after filing causes problems later on.
