You can keep your bank account while bankrupt in Canada but whether you have a joint bank account, or not, there are some things to consider.
Opening A New Bank Account
Before filing bankruptcy in Canada, we strongly recommend that you open a new bank account at an institution where you do not have any loans, credit cards or other relationships. This applies whether you have a joint bank account or not. Arrange to have all of your pay and deposits transferred to this new account before you file your bankruptcy or consumer proposal. The reason we recommend you start a new bank account is because it can take creditors some time to process changes to automatic payment withdrawals from your account. If you do not open a new bank account, your existing financial institution could accidentally continue to withdraw payments from your account immediately after your filing.
Special Considerations For A Joint Bank Account
If you do have a joint bank account, there are a couple of additional things you need to know.
Overdrafts:
First, with a joint bank account you are both legally responsible for any amount owing on this account (i.e. overdraft).
If you declare bankruptcy, your bankruptcy will clear you from the amount owing on your overdraft. Unfortunately your bankruptcy protection will not extend to the other party on the account. The result is that the other party to the joint account will be responsible for the full balance owing on that overdraft. For example, if you had an overdraft of $1,000 on a joint account with your spouse and you filed for bankruptcy, your spouse would still be responsible to pay the full $1,000 in overdraft debt.
Is there any way you can try to protect your spouse from this? Well you can always talk to the bank and ask to remove the other party from the account before you file. This is usually a long shot as the bank isn’t normally interested in allowing anyone to be released from their responsibility for a debt unless the debt is paid in full. But it is really the only thing you can do to try to insulate your spouse from being responsible for any overdraft on your joint account when you declare bankruptcy.
Cash Balance
If you have a large amount of money in this joint account, this is an asset that your trustee will have to examine to determine if you are entitled to keep it or must surrender it to the trustee.
When you file for bankruptcy your trustee must review the assets that you own and the bankruptcy exemptions available in your province to determine what you can keep and what you lose if you go bankrupt. Cash in a bank account is considered an asset that must be considered. Now you don’t have to worry that you would automatically lose all cash in this account, this is not the case. You are permitted to keep a ‘reasonable amount’ of cash on hand. The trustee must look at the amount of money you have in your account, compare it to your normal living expenses and determine if the cash on hand is reasonable. Usually you are permitted to keep sufficient money to cover your normal living expenses, but anything in addition to this you would lose as part of the bankruptcy. The reason this is important is that if you have a joint account, the same logic has to be applied to the money in the account and potentially this could adversely impact the joint account holder who is not looking at filing a bankruptcy.
So while normally your bankruptcy doesn’t affect anyone else, if you have a joint bank account these are two examples where it might. As a result, I often recommend that things are simpler if for the time being you keep your accounts separate, at least during the period of bankruptcy.
If you have any questions about joint accounts, or any other asset or debt, and how they would be treated in a bankruptcy, please contact a Bankruptcy Canada Trustee in your area. Consultations are always free.