Money Advice, Debt Advice & Debt Help
How is your bank account affected by debt?

How is your bank account affected by debt?

If you are struggling with debt and you are planning to use a debt management solution it is important to understand that you will need a bank account which you are in full control of.

Once you start a debt solution whether this is a DMP (Debt Management Plan) IVA (Individual Voluntary Arrangement) or Bankruptcy you will still have to manage your money yourself, ensure that all of your household bills are paid every month and of course make any agreed monthly payments to your creditors. You will find it very difficult to do this if you do not have a bank account.

However if you have your account with a bank that you owe money to then it is likely that you will have to stop using this and open a different one. There are a number of reasons for this.

Protecting your money from the banking set off rule

If you owe your bank money perhaps in the form of a credit card or a personal loan this debt will normally have to be included in your debt management solution. Once you start the solution the normal payments towards these debts will then stop and your accounts will fall into arrears.

When you get into arrears your bank can actually withdraw money from any current account that you also hold with them to repay the debts that you owe. They are able to do this based on a rule known as the banking right of set off. It means that any money that you were expecting to use for living expenses such as paying your rent or mortgage and doing the weekly shopping could suddenly disappear leaving you in a very difficult financial situation.

The only way to guarantee that you are protected from the set off rule and ensure that your bank does not take your money without your permission is to start using an account with a bank which is totally unrelated to any of the debts included in your debt management solution.

Protecting your money from Payday Loan companies

If you owe money to a Payday loan company it is likely that they take the payments you owe each week or month directly from your bank debit card. This type of payment is known as a Continuous Payment Authority. It allows the Payday loan company to make regular deductions from your card as per your contractual agreement.

The problem with a Continuous Payment Authority is that traditionally it has been very difficult to cancel if you want to stop the Payday loan company taking your money. Prior to 2013 even if you asked your bank to cancel the agreement they would claim that they could not guarantee it.

In 2013 the Government revised the rules surrounding Continuous Payment Authorities and made banks clearly responsible for ensuring that a continuous payment authority is no longer paid after they have been issued with a formal request for it to be cancelled.

This situation has certainly helped however to be 100% certain that your funds are protected from a Payday loan company’s continuous payment authority that you have previously set up the best solution is still to open a new bank account.

Is it ever possible to keep the bank account that I already have?

Generally speaking if you are planning to start a debt management solution the only time that you can continue to use a bank account that you already have is if the account is with a bank that is unrelated to any of the debts you plan to include in your agreement.

Of course rather than opening a new account if you already have a different bank account open that you are not using which is suitable then there is no reason why you should not use this account.

BMD Tip: There are certain additional restrictions on the account you will be able to have if you are starting an IVA (Individual Voluntary Arrangement) or planning to declare yourself Bankrupt. This is because there are certain banks which will not provide accounts for people if they start these type of debt solutions.