Struggling with debt can be stressful. But what if it gets to the point that a creditor freezes your bank account? You may feel hopeless and not sure what to do next. This situation is known as a bank levy. And it can interfere with your ability to pay your bills and manage your finances.
So, what is a levy on a bank account, exactly? And what can you do if you’re dealing with one? Here’s what you should know.
What Is a Levy on a Bank Account?
A bank account levy is a legal process that allows a creditor to take funds directly from a debtor’s bank account to satisfy a past-due debt. This action generally happens after the creditor has obtained a judgment against you in court.
In other words, creditors can’t simply decide to levy a bank account. In most cases, they must first sue you, win the case, and then get a judgment to do so.
There are a couple of exceptions, however. Government agencies like the Internal Revenue Service can levy bank accounts for unpaid back taxes without a court judgment. Additionally, federal student loans that are defaulted on can sometimes result in a bank account levy through an administrative garnishment process that doesn’t require a judgment. And there are some jurisdictions that allow bank levies pre-judgment.
The Legal Process Behind Bank Account Levies
Several legal steps take place, eventually culminating in a creditor receiving permission as a result of a judgment from a court to withdraw funds directly from your bank account. It’s a process that usually happens along with other debt collection efforts. Here’s a detailed look at how this process generally unfolds:
Step 1: Accumulating Debt
The whole process starts with you racking up debt, whether it’s loans, credit card debt, unpaid taxes, or other forms of debt. Of course, you’re expected to repay the debt according to the agreed terms. But you may have faced a financial hardship or other issue in your life that caused you to miss payments.
In the meantime, the creditor will do everything they can to get you to pay. However, if you continue missing payments on your debt, it goes into default status. At this point, the creditor may turn the debt over to an internal collections agency or sell it to a third-party debt buyer.
Step 2: Legal Actions
If you still fail to pay the debt in question, the creditor or debt collector (whomever currently owns the debt) will likely file a lawsuit against you seeking repayment. You are served with a notice of the lawsuit and provided an opportunity torespond to the legal complaint. Unless you settle the debt or get the case dismissed, the case proceeds to court.
Step 3: Court Judgment
If you are found liable for the debt, the court issues a judgment in favor of the creditor, validating the debt and the amount owed. With a judgment in hand, the creditor can take steps to enforce it, such as through wage garnishment, property liens, or bank levy.
Step 4: Levy Process Is Initiated
The creditor requests a writ of execution or a similar document from the court, which grants them the authority to seize assets or funds to satisfy the debt. In some jurisdictions, creditors must notify debtors of their intent to levy, providing a final opportunity for the debtor to settle the debt or negotiate payment terms. In other cases, your bank account could be levied without notice.
Step 5: Bank Levy Execution
The creditor then serves the writ of execution to your financial institution. Upon receiving the writ or similar judgment document, the bank freezes your account, preventing you from accessing the funds.
There is often a hold period (the length can vary depending on the jurisdiction, but it is often 15 to 21 days) during which you can challenge the levy or try to work out a solution with the creditor.
Step 6: Funds Transfer
If you don’t successfully challenge the levy, the bank transfers the specified funds to the creditor after the hold period. Once the debt is satisfied or arrangements have been made for repayment, the levy on the bank account is released.
How a Bank Account Levy Impacts Your Finances
A bank account levy can have a considerable impact on your finances. Here’s how:
- Frozen assets. Your bank account will be frozen, restricting access to your money. You won’t be able to withdraw money, pay bills, or make transfers until the levy is resolved.
- Potential overdrafts: If outstanding checks or automatic payments are processed during the levy, it could result in overdraft fees.
- Additional bank charges: The bank may impose fees for handling the levy, which will be deducted from your account.
- Credit score damage: While the bank levy itself might not directly affect your credit score, the underlying unpaid debt leading to the levy will likely hurt your credit, making it difficult to secure loans or credit in the future. The many missed payments leading up to the lawsuit and bank levy will have also damaged your credit considerably.
- Added stress: The levy can create a stressful financial situation, as you might be unable to meet your daily living expenses and other financial obligations.
Limitations and Exemptions for Bank Account Levy
The good news is that 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
Additionally, in the case of IRS levies, you may be able to put an end to the levy if you can prove that the loss of money is causing an immediate economic hardship. However, if an IRS bank levy is released, your debt remains. It simply means that your account will be unfrozen, and you’ll need to make other arrangements with the IRS to repay the tax debt you owe.
How to Stop a Bank Levy
Stopping or reversing a bank levy can be challenging, but it’s not impossible. That’s especially true if the levy is the result of an error. Here are some of your options:
- Consult with an attorney. First, it’s strongly recommended that you get legal help. Seek the guidance of an experienced debt relief attorney experienced in debt settlement or judgment relief to understand your options and rights. They can review your situation and recommend the best course of action.
- Negotiate with the creditor. One option to end a bank account levy is attempting to negotiate a settlement or installment agreement with the creditor or collection agency. If you can come to an agreement, they might agree to release the levy.
- File an exemption claim. If you believe the funds in your account are exempt from a levy, you can file a claim of exemption with the court. Exempt funds might include Social Security benefits, disability benefits, etc.
- Challenge the levy. If there are legitimate grounds, you can challenge the levy in court. This might involve proving that the statute of limitations has expired, you were the victim of identity theft, or the debt is not yours.
- File bankruptcy. Filing for bankruptcy can stop most bank levies, but this should be considered a last resort due to its severe implications on your credit history and financial stability. Again, a debt relief or bankruptcy attorney can help determine if filing for bankruptcy is a possible solution.
Call Tayne Law for Help With Creditors
The experienced debt relief attorneys at the Tayne Law Group are here to help. If you’re dealing with a bank levy, we may be able to help you get your money back and your outstanding debt resolved as quickly as possible. Call us for a free phone consultation at 866-890-7337 or fill out our short contact form, and we’ll contact you. All conversations are confidential, and we never share or sell your information.
