If you’re currently facing a debt collection lawsuit or recently had a judgment entered against you, one question on your mind may be: “Can my business bank account be garnished for a personal judgment?”
As a business owner, keeping your personal and business finances is key, as is protecting your assets. So if you’re concerned about how a personal judgment might impact your business bank account, here’s what you should know.
Is My Business Liable for My Personal Debt?
Generally, your business is not liable for your personal debts, but this can depend on the structure of your business and other factors. If you operate a sole proprietorship, your personal and business assets are not legally separated, which means your personal debts could potentially affect your business.
However, suppose your business is structured as a corporation or limited liability company (LLC). In that case, there is usually a legal distinction between your personal and business finances, offering some protection to your business assets from personal debts. Nevertheless, personal guarantees or commingling of funds can blur these lines, so it’s important to maintain a clear separation between personal and business finances.
Can my Business Bank Account be Garnished for a Personal Judgment?
In most cases, a business bank account cannot be garnished for a personal judgment, especially if the business is a separate legal entity like a corporation or an LLC with a separate tax ID number. These structures provide a legal distinction between your personal and business finances.
However, suppose your business is a sole proprietorship. In that case, it might not have the same protection, as personal and business assets are not legally distinct in this structure, especially if it doesn’t have a separate tax ID number or federal EIN. Additionally, if there is evidence of commingling funds between personal and business accounts, or if personal guarantees are involved, it might be possible for creditors to pursue business assets.
It’s always a good idea to consult an experienced business debt attorney who normally deals with business and personal debt issues for guidance specific to your situation. A debt relief attorney can review your current situation and suggest how to best protect your assets. They can also assist you if you’re facing a lawsuit or have a judgment entered against you.
What Is a Bank Levy and How Does It Happen?
A bank levy is a legal action that allows creditors to take funds directly from your bank account. It typically occurs after a creditor obtains a court judgment against you for unpaid debts.
Once the creditor has the court judgment, they can request a bank levy, where the bank is legally required to freeze your account and remit the specified amount to the creditor. This process is often used for significant unpaid debts like taxes, child support, or judgment debts. You’ll usually receive a notice before the levy takes effect, allowing some time to take action or contest the levy. However, that’s not always the case.
How Much Can Be Garnished From a Bank Account?
The amount that can be “garnished” from a bank account through a bank levy depends on a few factors, including the type of debt, state laws, and the amount of money owed. For instance, for federal tax debts, the IRS can levy funds up to the amount of the tax debt. Different states may have specific rules limiting the amount that can be taken.
Fortunately, not all types of income can be seized by a creditor. Federal law exempts certain funds from being subjected to a bank levy, including:
- Social Security benefits
- Supplemental Security Income (SSI)
- Veterans benefits
- Student loan disbursements
- Federal Emergency Management Agency (FEMA) aid
- Federal, civil service, or railroad retirement benefits
How to Prevent Bank Account Garnishment
Having your bank account levied or frozen by a creditor can wreak havoc on your finances and cause many headaches. It’s a situation you want to prevent, which you can do by following some important steps:
- Stay on top of your debt. Be aware of your debts and the potential consequences of not paying them. If a creditor has threatened legal action, take it seriously.
- Respond to communications. If you receive any legal notices or communication from creditors, don’t ignore them. Respond promptly and contact an experienced attorney for guidance if needed.
- Negotiate with creditors. Before a bank levy occurs, you can try to negotiate a settlement or payment plan with your creditor instead. Many creditors prefer to arrange a payment plan or settlement rather than go through the legal process of a bank levy since it takes up time and resources.
- Consider bankruptcy. If your debt situation is severe, filing for either a Chapter 7 or Chapter 13 bankruptcy might be an option. Bankruptcy can provide protection from creditors, including stopping bank levies. However, bankruptcy also has significant long-term financial implications, so it should be considered a last-resort option. Additionally, keep in mind that you also have to qualify for bankruptcy.
Protecting Your Business Bank Accounts From Personal Judgments
Protecting your business bank account from personal judgments involves careful financial and legal planning. Here are some strategies that can help safeguard your business assets:
- Form a separate legal entity. Operate your business as a corporation (like an S-Corp or C-Corp) or an LLC. This can help provide a legal distinction between your personal and business assets. In many cases, creditors of your personal debts may not be able to pursue the assets of your corporation or LLC.
- Maintain corporate formalities. Properly maintain your business entity by keeping up with all required filings, holding regular meetings, and keeping business records. Commingling personal and business finances can lead to a legal concept known as “piercing the corporate veil,” where personal and business assets are treated as one.
- Separate finances. Keep your personal finances and business finances completely separate. For example, open different bank accounts and credit cards for your business and personal finance. Also, ensure that all transactions between your personal and business accounts are properly documented.
- Maintain adequate insurance. Make sure you have sufficient insurance for your business. Liability insurance, for example, can protect your business assets in case of a lawsuit against the business under certain circumstances.
- Avoid personal guarantees. When securing financing or signing contracts for your business, try to avoid giving personal guarantees. If a personal guarantee is unavoidable, try to limit its scope and always read the agreement fully.
Call Tayne Law Today
Tayne Law Group’s experienced debt-help attorneys and staff know how to protect the rights of both consumers and business owners with debt-related issues. If you have concerns about past-due debt, business debts, accounts in collections, threats from debt collectors, MCA lenders, or even a lawsuit, get in touch and find out how we can help. Call us for a free phone consultation at 866-890-7337 or fill out our short contact form. We never share or sell your information, and all conversations are confidential.
