One of the most frightening jolts you can get financially is to go into a bank account to see if you have enough to cover off a payment only to find a zero balance.
You’re in financial hardship; you’re juggling payments to make sure one doesn’t get too far behind; you’re trying to pay as best you can and in one fell swoop, you’re left with zero and you don’t know if you’re going to be able to pay the rent or make the car payment. What happened?
In all cases, it’s because one of your debts is to your bank (a mortgage, loan, credit card or line of credit) and they have the right to take what they can to pay off some or all of the amount owed to them, even if it leaves your bank account empty. And pleading your case won’t do you any good because their payment is more important than all the other payments you may have.
When you borrow money, there are two types — secured and unsecured. Secured debt is a loan that is borrowed against some property — a house, a piece of furniture or a car, for example — and the creditor has the right to seize your property and (with notice) sell it off to pay off your debt. A mortgage is the best example of a secured contract — if you don’t make your payments, the bank can repossess your house and sell it to pay off the amount owed. A financed car purchase is another example, where the dealership technically owns your car until the last payment is made.
A credit card is unsecured debt. Even though you fill out an application that indicates you have a mortgage (maybe with the same bank) and/or a car, the credit card company can’t seize your house or your car to pay off the amount outstanding to them. What they can do, is take money directly out of an account you may have with that bank.
And if you get wise to this and don’t leave any money in that account until such time as it’s needed to make other payments, they may get wise to your ways and garnishee (or freeze) your account, in which case deposits are allowed but withdrawals are not (whether those are cash withdrawals or automatic transactions).
Banks don’t have to notify you before this happens because they don’t have to get permission from a court to do this. Neither do government agencies (if you owe back taxes or support), but other creditors have to sue you in order to gain access to your accounts.
They usually send you notice that they are considering the action and if you don’t act on it, they will file a suit to recover what is owed, including gaining access to your accounts. If you are sued, you have to go to court in your own defence and if judgment is awarded to the collector, you will have to pay all fees and costs, in addition to the debt and related penalties.
It should be noted that there is a statute of limitations on owed debt, which in Ontario is two years after the last payment was made. If you have unsecured debt and haven’t made a payment in two years, and your creditor hasn’t sued you to recover the money, the threat of a claims suit is not valid. If they do attempt to sue you, you may still have to go to court in defence and plead the expiration of the limitation on your unsecured debt.
It is important to note, though, that if you make a payment (regardless of whether it’s a bluff) — even a small one — the two-year clock resets and they can then initiate a suit for all the money owed.