When we are contacted by individuals who are considering filing a bankruptcy or consumer proposal in Edmonton, Alberta, we always suggest that they immediately open a new bank account. While this is a suggestion and not a legislative requirement; it is almost always in their best interests to do so.

There are really only three scenarios that opening this new account is critical, but we find that at least one of these applies to virtually all of our inquiries.

The most common situation involves people who owe money to the institution that they are currently banking with. In this situation, the institution (i.e. the bank) often tries to seize any monies in your account and directly apply them to the outstanding loans. Legally speaking, this is referred to as “set-off,” and in the absence of a bankruptcy or proposal this is their right. However, the day you file the bankruptcy or proposal, this right is lost. Unfortunately, there is a delay between the time you sign all the required documents and when they are received and processed by the bank. Realistically speaking, if during this delay any funds are seized, the trustee can arrange for the funds to be returned, but this often can take up to 3 months and may cause some difficulties for you if the monies are required for day to day living expenses.

Over the last decade, it has become common practice to arrange bill payments to automatically be withdrawn from your account (i.e. direct payment). Due to the same unavoidable delay, payments are often withdrawn after the date of signing. In fact, it often takes a couple of months for the bank to recognize the filing of a bankruptcy or a proposal, and if they continue to take payments out of the account when they aren’t entitled, you may again experience the same problem as in the first scenario. We can get the money returned, but again it can often take time.

The third scenario that can create difficulties is if you have an overdraft on your account. Technically the overdraft is an unsecured debt, and the filing of a bankruptcy or proposal will serve to automatically cancel and clear this debt. This really only becomes an issue if you make any deposits into the account, because the bank will automatically use the monies to reduce the amount you are in overdraft, and it can often be very difficult to trace these types of transactions. As a result, the funds may not be recoverable by the trustee.