Bank accounts are impacted by the filing of a bankrupt, or a proposal for that matter since many of the bankruptcy provisions apply equally to proposals. Banks may seize funds in accounts as an offset (or setoff) because they have a contractual right to do so. In other words, if you went bankrupt in the afternoon following the deposit of your paycheque in the morning, the bank would have a right to withhold your paycheque up to the value of the debts owed to them.
Our advice, to all consumers, is, whether or not you are filing an insolvency proceeding, it is advisable to move your banking to a bank where you do not owe money. Ironically of course this advice may restrict your access to credit, because the lending bank will lose its right of offset and have no control over other assets and banking business you may be conducting. But that doesn’t have to be a bad thing.
When you make an assignment into bankruptcy (or file a proposal) Section
78 of the Bankruptcy & Insolvency Act requires that:
Bank must notify trustee
78 Where a banker has ascertained that a person having an account with the banker is an undischarged bankrupt, it is his duty forthwith to inform the trustee of the existence of the account, and thereafter the banker shall not make any payments out of the account, except under an order of the court or in accordance with instructions from the trustee, unless on the expiration of one month from the date of giving the information no instructions have been received from the trustee.
Imposing that duty on bankers is understandably onerous and is seldom resorted to or enforced by trustees. In fact, other than one or two instances involving corporate bankruptcies I cannot remember a time when a bank volunteered that information. I can, however, remember several instances where banks have continued to pay themselves, post bankruptcy/proposal, from overdraft in the hopes that they can pursue the insolvent customer for a “post bankruptcy” debt. Once reminded of their duties under this, often overlooked, Section of the Act they have no choice but respect the law.