Can your bank take your money from you? They sure can...

The Canadian Banks’ 'Right of Offset'

Here is an issue that we talk about daily with almost all our new clients: their main bank and the bank’s right of offset.

The Bank Act affords banks the right to use the money you have on deposit with them to pay any outstanding debts with that institution. In other words, if you owe Bank A $7,000 on a VISA with them and you miss enough minimum payments, the bank can then apply any funds you have in any account with Bank A against either the amount of arrears of the entire balance owing.

I meet with people every day who owe lots of debt to big banks. Typically at least one of those debts is with their main bank. That’s the Canadian way: all of us over a certain age have a big bank that we bank with for our normal banking: our pay deposit and day-to-day transactions. We usually inherited our parents’ bank when we were kids or very young adults (less common now) and just remained there. Maybe we got other banks along the way, but we tend to stick with a big bank due to normal inertia.

But very few people seem to be aware of this right of offset. It isn’t something the banks tell you about, for sure.

In fairness, it’s not commonly invoked by a bank, but sometimes prevailing economic conditions (ie banks being less rich than they usually are) means a bank may clamp down by various means at its disposal on payment arrears in general. And that is sure happening these days. As people miss more payments in general, banks can adjust their triggers or mechanisms upon which they may invoke this right.

We always advise new clients to switch banks if they owe their main bank. Always. They are either behind on payments when they contact us, or they will be ceasing payments when we file either a bankruptcy or a consumer proposal (since we are filing the insolvency instead). And once the bank gets notice of the insolvency proceeding, we have to assume they will red flag any and all accounts to use funds on deposit to offset any loss they are about to take.

And your relationship with the bank matters not here: you may have been with them since you were 12, but this is business.

There is no maximum amount they can take, either, other than to offset the entire debt fully.

This may also apply to joint accounts: if you are the debtor and your spouse isn’t, the bank can still take funds from the joint account to offset YOUR debt. A joint account is basically blind to the bank: they just see your name on the account for their purposes. If it happens to be your spouse’s income in there, so be it.

So: switch banks, get your pay deposited into the new bank, have any other sources of income inputs deposited there, as well (because the bank doesn’t care about the source of the funds – they will offset whatever they can with any funds on deposit.) So you may have, in addition to your normal pay, government income like pensions etc. that come from either Service Canada and/or your province, or you may have funds being transferred to you by family or business clients – it doesn’t matter. Have them all changed, and change your bill payments, as well.

This subject can be a difficult discussion with older Canadians in particular, as they can be a little more deferent to authority than younger people. I’ve had one incident in all my 15 years of telling people daily to change banks where the person promised they would do it and then didn’t – unbeknownst to me – maybe because they got cold feet? And sure enough, after we filed, their bank swiped substantial funds from them despite a banking relationship of several decades.

Changing banks to a bank you don’t owe money to is just good personal business. That empowers you with your money and removes the threat of offset. At least then you have a modicum of control (because I like using big words in a sentence when I can) over your funds rather than exposing yourself to what could be a catastrophic seizure of funds.