If you have outstanding unpaid debt, creditors may be able to garnish your bank account. This is similar to a wage garnishment except it’s on your bank account instead of your paycheck, and some of the rules are different. Learn about what these rules are, what you can do to defend yourself from a bank account levy, and whether a bankruptcy could help end the account garnishments.
Written by Lawyer John Coble.
Updated August 10, 2023
If you have outstanding unpaid debt, creditors may be able to garnish your bank account. This is either called a bank levy or account garnishment. It is similar to a wage garnishment except it’s on your bank account instead of your paycheck, and some of the rules are different. Creditors are limited to garnishing 25% of your disposable income limit for most wage garnishments. But there are no such limitations with bank accounts. But, there are some exemptions for bank accounts that are better than the 25% rule allowed for wages. This article will discuss the defenses to a bank account levy. This article will also discuss how bankruptcy can help with account garnishments.
How A Creditor Can Garnish Your Bank Account
Most creditors need a court order to levy your bank account. In legal terms, this is called a writ of garnishment. Government creditors like child support agencies, the IRS, and the Department of Education don't need court orders to garnish your account. Garnishment orders force banks to take any money you put into your account until the full amount of your debt has been paid.
If a creditor wants to garnish your account, they must first obtain a judgment against you. Financial institutions such as credit card companies, debt collectors, collection agencies, and other lenders commonly seek judgments against debtors. Court judgments are the outcome of lawsuits. A creditor must win in court to get a judgment against you. After the creditor has a judgment against you, they can request a levy order from the court.
Before a lawsuit can go forward, the creditor must file a complaint with the court. Then they must serve a summons and complaint to you. If you want a trial, you must file an answer to the creditor's complaint with the court. Each state and each level of court within a state will have a different time limit for you to answer. Usually, a small claims court will give you less time to answer than a higher-level court. This is because higher-level courts often have more complex cases.
After you've filed your answer with the court and served that answer on the creditor-plaintiff, the matter will be set for trial. The creditor will have to prove you owe the debt, and you can raise defenses to the creditor's claim, such as the following:
You’ve already paid the debt.
The statute of limitations has lapsed.
The creditor violated the Fair Debt Collection Practices Act (FDCPA).
You’ve been the victim of identity theft.
Whatever you do, don't ignore a summons. If you fail to answer the plaintiff's complaint or answer without raising a defense, the court will enter a default judgment against you. This is like forfeiture in a basketball game. If you don't show up, you lose. Regardless of whether the judgment creditor gets the judgment after a trial or by default, the judgment creditor will be able to levy your bank account.
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How Bankruptcy Can Save Your Accounts From Bank Levies And Account Garnishment
When you file for bankruptcy, whether it's Chapter 7 or Chapter 13, you’ll be granted an automatic stay. This means creditors must stop most collection activity against you—including account garnishments or levies—during the bankruptcy proceedings. In other words, from the minute you file bankruptcy, a creditor can't levy your bank account unless they can convince the bankruptcy judge to lift the automatic stay. You will still be required to continue paying some debts, though, like child support payments.
Once your debt is discharged in bankruptcy, the creditor will never be able to collect the debt, through account garnishment or any other means. In a Chapter 7 bankruptcy, all general unsecured debts are usually discharged. General unsecured debts are debts that have no collateral (like a house or car) securing them. This doesn’t include priority debt, which includes child support payments and most taxes, or non-dischargeable debt.
Upsolve provides a free web tool that helps people file straightforward Chapter 7 bankruptcies. If your case is more complex, Upsolve can help you find an experienced bankruptcy attorney in your area to help you with your case.
Other Options For Removing Garnishments From Your Bank Accounts
Bankruptcy isn’t the only way to get a bank levy removed from your account. You have other options, too. If you have the funds, the simplest thing to do is pay off the debt that's the subject of the bank levy.
If you’re unable to do that, consider negotiating with the creditor. You can do this even after they’ve obtained a judgment against you. But it’s always best to negotiate with a creditor before trial. Why would a creditor be open to negotiation? To avoid the cost of trial or paying an attorney to enforce a judgment against you. If you have a defense to the debt, you can use it as a bargaining chip with the creditor. If the creditor thinks they may lose, they're much more likely to settle with you.
Sometimes, it's difficult to know if you have a good defense. With such a case, it's a good idea to consult with a debtors’ attorney. If you have other debts, you may want to take care of all the debts at once with bankruptcy. But, if you only have one debt, you may want to find a debt relief attorney who will defend you in state court. With small claims courts, it may be best to get legal advice from an attorney and then defend yourself in the court case. When you do this, make sure to bring evidence, such as payment receipts, to prove your case to the court.
Exempt And Non-Exempt Income
Even if you owe the debt a creditor seeks to garnish, the money in your bank account may be exempt from a levy. Federal law prohibits bank levies on Social Security payments, Supplemental Security Income (SSI) payments, veteran's benefits, student assistance, and many other types of federal benefits. You can find more information about exempt federal benefits from the Federal Trade Commission. State laws usually exempt workers’ compensation and child support payments received.
If you have a bank account with funds from exempt and non-exempt sources, it may be difficult to prove which funds are exempt. If funds in this account are garnished, you may have to wait for a court to order the return of your funds. The wait can be a month or more. To get around this problem, it's best to keep exempt and non-exempt funds in separate accounts. These days, there are many internet-only banks that will provide completely free banking for you if you have money direct-deposited into the account.
When a bank receives a levy, it is required by federal law to check to see if any exempt federal benefits were direct-deposited into an account within the last two months. If federal exempt benefits were direct-deposited during this lookback period, the bank is required to determine which benefits are exempt before complying with the levy. This requirement doesn’t apply to banks if you deposit a paper check instead of using direct deposit.
If the funds in your account aren't exempt, you may be able to exempt the funds anyway. If you live in a state with a wildcard exemption, cash exemption, or bank account exemption, you may be able to use these to keep the money in your bank account. You should raise your claim of exemption immediately when you get the notice of the levy.
Bank account levies are among the most frustrating collection techniques. Your account is immediately frozen, and if you try to use your debit card, it will be declined even though you know you have money in the account.
If you get a notice of a bank account levy and don’t know what to do, remember you have options. You could use your exemptions or try to negotiate with the creditor to find a suitable alternative. If these options don’t work, it’s a good idea to consult with a bankruptcy attorney. Bankruptcy is the strongest tool in your arsenal because it can stop most levies and garnishments.