How to Fix a Frozen Canadian Bank Account – And What Can You Do About it?

Frozen Bank Account in Canada

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Few things are more frustrating and worrying than having your bank account frozen in Canada. After all, you use it to pay for your living expenses, collect your paycheque, and perform a slew of other financial transactions.

A frozen bank account in Canada generally stems from an unpaid debt. Creditors and the Canada Revenue Agency (CRA) can initiate a freeze on your account to encourage you to repay what you owe. And they can keep this freeze going for a long time, which is concerning if you lack the funds to pay off your debts.

Your bank account is the foundation for your financial security. As a result, losing access to it can cause immense hardship for your household, especially if you’re already struggling with debt and a tight budget. For this reason, knowing what to do should you find yourself locked out of your account is vital.

In the article, we’ll explain who can legally freeze your bank account, how they do it, and the steps you can take to unfreeze it.

Who can freeze your bank account in Canada?

The Bank Act of Canada grants certain companies and organizations the power to freeze your bank account. They generally fall under three categories: banks, general creditors, and the Canada Revenue Agency (CRA).

Banks

Your bank can freeze your account if you’ve fallen behind on debt payments you owe them. They can do this freely and instantly and without a court order. The reason is that your loan contract likely includes a clause that permits them to lock your account if you fail to make your payments on time.

Banks may also seize your funds via the “right of offset.” This clause in your loan contract allows them to take money from another account you maintain at their institution and apply it against the debt you owe. Your bank can employ the right of offset without informing you or asking for your permission.

Suppose you owe money to one bank, let’s say RBC, but keep your money in another, like TD. Could RBC freeze your TD bank account? 

The answer is “yes.” However, in this scenario, the process isn’t as straightforward, as you hold no funds in an RBC account. RBC would need to obtain a court-ordered judgment before they can put a hold on your account. Then they can withdraw the money from your account should they get a wage garnishment order from the court.

General Creditors

Like banks, various creditors can take action to freeze your bank account if you’ve failed to keep up with your debt payments. These include car dealerships, payday loan companies, non-bank credit card issuers, and various finance companies.

Unless you hold another account with your creditor flush with cash, they cannot use the right of offset to collect the money you owe them. Nor can they request your financial institution to release the funds in your account to settle your debt. Instead, they must go to court and secure a judgment against you to freeze your account.

Like a bank, your creditors can also apply for a wage garnishment order to withdraw funds from your account.

However, if your outstanding debt is small, your creditor may not deem it worthwhile to pursue a court order for a bank account freeze. Instead, they could write off your existing balance as a loss rather than spend the time, money, and effort to reclaim it.

In addition, creditors are likely to use other means of collecting unpaid debts before resorting to an account freeze.

For example, an auto financing firm would first rely on collection calls to recover the money you owe. Then, they’ll repossess your vehicle and use the funds to cover your outstanding balance. If there’s a shortfall following the sale, it’s only then that they would consider pursuing a court order to lock your bank account.

Canada Revenue Agency (CRA)

This organization probably elicits the most fear regarding frozen bank accounts in Canada. The reason is that the CRA has extensive powers to collect unpaid debts from taxpayers. If you owe money to the CRA, the government organization can freeze your bank account without a court order.

However, like many financial institutions, they can exercise the right of offset to collect on past-due debts. For example, let’s assume you owe income tax to the CRA and expect a sizable tax refund. In this case, the CRA can withhold your refund and use the funds to cover your tax debt.

The first steps to take when your bank account gets frozen

When you discover that a creditor has frozen your bank account, it’s easy to become overwhelmed by panic and fear. However, it’s important to take a step back, assess the situation rationally and explore possible remedies.

Step 1: Contact your bank to obtain the necessary details

Your first task is to contact your banking institution to determine which of your creditors initiated the freeze. They’ll be able to supply you with your creditor’s contact information. You may need these details to work out a payment plan.

Remember: just because your money is inaccessible to you currently doesn’t mean it’s disappeared – it may still be in your account. Your creditors may not have taken action to seize it, at least not yet.

Step 2: Open a new bank account at another financial institution

Your second task should be to open a new bank account at an alternative financial institution. That way, you’ll have another way to conduct transactions like depositing paycheques and making bill payments.

There’s no telling how long it may take you to reach an agreement with your creditors that will result in you regaining access to your main account. A second account will keep you afloat until you find a solution. 

Be sure to supply your employer with your new bank account details as soon as possible to continue receiving your paycheque. Do the same for pre-authorized debit accounts to stay current with your bills.

How to unfreeze your bank account

Naturally, the quickest way to unfreeze your bank account is to pay your creditor what you owe. However, if that’s not possible, given your financial situation, try to arrange a new payment plan with your creditors. 

The same concept applies to the CRA. As soon as possible, contact the organization to negotiate a repayment schedule. While the CRA may seem intimidating, they’re usually receptive and flexible regarding payment plans. If you maintain open communication with them, they’ll be willing to cooperate with you and help you pay off your tax debt. 

Suppose that your creditors are unwilling to accept your revised payment plan. In that case, you may consider considering legal options to settle your debts. In Canada, two debt relief programs are available: consumer proposal and bankruptcy

A consumer proposal allows you to consolidate all your unsecured debts (including tax debt) and negotiate a new payment plan with your creditors. Unlike a debt repayment plan you arrange personally, a consumer proposal is legally binding on your creditors. In addition, you can reduce your total debts by up to 80%, leaving you with a much more manageable debt load. You don’t need to surrender any of your assets, either.

Bankruptcy is another viable long-term solution to discharge your debts. Unlike a consumer proposal, you can eliminate 100% (or close) of your unsecured debts. However, the trade-off is that you’ll need to give up some of your assets to your creditors.

A notable aspect of a consumer proposal and bankruptcy is that both shield you against legal actions from your creditors. As a result, they’ll no longer have the right to freeze your bank account. And any account currently frozen will be reinstated for you to use again.

Only a Licensed Insolvency Trustee can administer a consumer proposal or bankruptcy on your behalf in Canada.

How long can a bank account be frozen in Canada?

There’s no time limit for how long your bank account can remain frozen in Canada. This is especially true if you owe money to the CRA – they can maintain a hold on your account until you repay your balance in full. For creditors requiring a legal judgment, the time frame lasts as long as the court order is valid. However, a creditor can renew the order multiple times, usually.

Has a creditor frozen your bank account? We can help you thaw it out!

If a creditor has frozen your bank account in Canada, it’s crucial to act quickly to resolve the issue. If you wait too long and do nothing to improve the situation, your creditor may eventually pursue a court order to garnish your wages. The CRA can do the same and even place a lien on your home and other assets.

Start by obtaining your creditor’s contact details and opening a new account at another financial institution. Then, map out a plan to deal with your past-due debt.

Unsure what the best way is to fix your debt problems? A Licensed Insolvency Trustee can help you find the right solution.

At David Sklar & Associates, we’ve helped thousands of people overcome wage garnishments, lawsuits, and other actions by creditors, including freezing bank accounts. We’ll help you map out a strategy to resolve your debts and help get your bank account up and running in no time.

Learn more about your debt relief options or book a free, no-obligation consultation with us. For over 20 years, we’ve helped people from all walks of life rebuild their finances – we can help you, too!

Photo by Andrea Piacquadio

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