Understanding a Bank Levy and What You Can Do About It

If a creditor can establish that you have an unpaid debt, they may be able to use a collection action called a bank levy. This allows them to seize the funds you owe directly from your bank account. Most creditors will have to jump through some legal hoops to do this, but some government agencies don’t need to go to court before levying your bank account.

A bank levy can be especially harsh if it cleans out your account, but there may be ways to protect some or all of your money. Learning about the rules, including your defenses, will help you know what to do and when to seek additional help.

What Is a Bank Levy? 

A bank levy is a tool that creditors can use to seize funds from a debtor’s bank account to satisfy an unpaid debt. This debt could be from an unsecured loan, a medical bill, or a student loan. The IRS can even use a bank levy to collect unpaid taxes. 

To initiate a levy, creditors will serve documents on the bank or financial institution where your account is held. The bank then freezes or puts a hold on the funds subject to the levy. This will typically be the money you have stored in your checking or savings accounts. You should have the opportunity to challenge a levy in court. If the challenge isn’t successful, the bank will send the funds to the creditor to satisfy the debt.   

It takes time and money for lenders to seize funds from an account. They also don’t know your account balance before heading into the levy process. Because of this, creditors usually only use a bank levy once they’ve exhausted all other means to collect the unpaid debt.    

How Do Bank Levies Work? 

The levy process starts with a past-due debt and a creditor looking for ways to collect. It usually follows less formal collection efforts, like collections calls. Most lenders have to get court approval to levy an account. Court approval generally begins with the creditor filing a lawsuit against you. If they are successful, the court will issue an order stating how much you legally owe. This is called a money judgment. This is the best, and sometimes only, time for you to challenge the actual amount owed.   

The money judgment gives the lender various ways to collect, including placing a levy on your accounts. State law will determine exactly how they can get money from an account and if there are any limits to how much money they can take or any funds that are exempt. To levy an account, a creditor must have the necessary legal documents. This includes the money judgment and anything else required by state law. Some states, for example, require a separate writ of execution (similar to a court order) identifying the accounts that will be levied. 

Once the creditor provides the bank with the levy documents, the bank will freeze the account. This will stop all withdrawals. If you have more funds in your account than what you owe on the debt, the lender can only the funds in the amount that you owe. The freeze will be in place for several weeks, generally 21 days. You may or may not be notified that the levy is in progress. As if the levy itself isn’t bad enough, banks may even charge you a fee to process the levy as well.  

Some bank levies remain on an account until the debt is paid or the levy is lifted. And a levy can be used more than once, even on the same account. If sufficient funds aren’t available on the creditor's first attempt, they can retry as many times as needed to repay the debt.    

To remove or lift the levy, you must either pay the debt in full or show that the funds in the account are exempt from the levy. Similar to wage garnishment exemptions, certain types of income in bank accounts may be exempt or excepted from levy. 

Agencies That Don’t Need Court Approval to Levy Funds

Some government agencies, such as the Internal Revenue Service (IRS) and the Department of Education, don’t need a court judgment to place a levy on an account. This is also the case if the federal government is collecting on a student loan. But they are legally required to give you plenty of notice. The IRS, for example, will mail you a final notice of intent to levy at least 30 days before it serves a tax levy on a bank.  

Other Ways Judgment Creditors Can Try To Collect on a Debt 

Levying your bank account is just one way a judgment creditor can collect an outstanding debt. Levies have the advantage of giving the lender access to a potentially large sum of cash. They do have other options, though. The items they can seize and the ways you can protect yourself vary by state. Some examples include: 

• Wages: Creditors can levy a portion of an employee’s wages. This is called wage garnishment. As with other collection actions, lenders generally need to get the proper legal documents from a court before garnishing your wages. If they do, an employer may have to turn over a portion of your wages. But they can’t take it all. Federal and state laws determine the maximum amount that can be garnished. It’s often capped at around 25%. It can vary by the type of debt and the governing state law.     

• Real Property: Mortgage lenders can also force the sale of real property. They can place a lien on your home and either force a sale, called a foreclosure sale, or get paid when you sell the home. After the sale, the proceeds are paid to “lift” the lien. The mortgage lender has to jump through a lot of hoops to force a sale and you may be able to protect your home from foreclosure.  

• Personal property: Lenders can also obtain a writ of execution from a court to seize personal property. The writ authorizes a sheriff or other public official to go to your home or business and seize assets (such as cash register, boats, jewelry, etc.). They can even take your car in certain situations. The property can then be sold at a public auction and the proceeds are applied to the debt. The IRS refers to this as a “writ of entry.” Not all property can be seized, though. If a creditor has a judgment against you, it can be helpful to know what types of personal property are exempt and what personal property can be seized.  

Lenders have options when collecting on an unpaid debt and many factors come into play. Foreclosing on real property and seizing (and selling) personal property can be time-consuming and have an uncertain payoff. This may encourage debt collectors to negotiate with you on a repayment plan or even write the debt off as uncollectible. You may have options too, including some defenses to collection efforts.   

What Can You Do To Dispute a Bank Account Levy? 

Knowing what to do if your bank account is levied could save all or part of your funds from being seized. You may need those funds for living expenses, like a roof over your head and food. If the lender has followed the proper procedure, you should have an opportunity to dispute the levy on your account.   

If a creditor is required to obtain a writ of execution from the court, it generally comes with the requirement to give you notice. You’ll likely have to act within a few days (usually 10) of receiving the notice. This will allow you to raise the defenses and exemptions discussed below. A few states further protect consumer accounts by requiring both the judgment creditor and the bank to take certain steps before the account can be frozen or levied.

Even if you don’t receive notice, because it’s not always required, you’ll likely learn about the levy by trying to withdraw funds since your funds will be frozen for several weeks. A levy isn’t the only reason your funds may be frozen, though. Your bank may freeze your account if they detect suspicious activity. If your funds are frozen, you should contact your bank and ask why. They should be able to explain the problem. If it is a levy, you’ll need to act fast to defend against it.

Defenses Against a Bank Levy

In response to a levy on your account, you should consider all defenses. Presenting a valid defense will help protect the money in your account. 

• Look for errors in the judgment. Determine if you actually owe the money and that the amount levied is correct. Look for other errors as well, like levies against accounts that aren’t listed in the writ of execution. Everybody makes mistakes. 

• Show you’re the victim of identity theft and the debt isn’t valid. This is sometimes the case with credit card debt.  

• Object for lack of notice. If you’re not given the required notices it may be possible to lift the levy. The creditor may be able to repeat the process and give you the required notice, but this will still give you more time to prepare other defenses. And remember, not all lenders are required to give you notice.

• Examine the statute of limitations. Lenders are generally required to collect on a judgment within a certain time, often 4-10 years. If they don’t, they’re out of luck. This will depend on applicable state law, the credit agreement, the type of debt (credit card, car loan, tax levy, etc.), and other factors. 

• File for bankruptcy. Filing for bankruptcy will put a hold on collection efforts. It may be a temporary hold, but it allows a court to step in and determine which assets may be used to satisfy debts. It may also be a way to get the debt discharged that’s the source of the levy.  

• Negotiate with the creditor. Consider negotiating with the lender to lift the levy. They often want to avoid costly and time-consuming collection efforts. They may be willing to accept a repayment plan, for example.     

• Present a case for financial hardship. IRS levies should give you time to voice any defenses. Check for errors, as they do make mistakes. If you can, make other arrangements for payment of the back taxes. It’s also possible the IRS will release the levy if it determines the process is causing a taxpayer serious financial hardship. 

• Use another account. You’re not required to keep using an account subject to a levy. Not using the account may not cause the lender to lift or not refile the levy. But it can limit your losses while you decide what to do. This can also help protect exempt funds if they are directly deposited into your account.   

Funds That Are Exempt From Bank Levy

In response to a bank levy, you’ll want to consider all exemptions. Exempt funds will not be seized from the account. A court or the bank will determine if your account contains funds that are protected. Funds that may be protected include, but are not limited to:    

• Federal payments and benefits, including Social Security benefits, Supplemental Security Income (SSI) benefits, federal employee pensions, and veteran’s benefits. You may lose protection for these payments if the federal government initiated the levy.  

• Money you’ve received for child support payments. 

• Unemployment compensation benefits, though there are exceptions, including if you owe child support. Past due child support is a high-priority debt and it can be withheld directly from unemployment insurance benefits. It can also be seized from a bank account. The rules vary by state.  

Some states also protect a minimum amount in your bank account. For example, New York sets two separate minimum baseline balances that cannot be frozen or levied, one based on exempt income and the other based on wages. If any exempt funds were deposited into an account within the past 45 days, a certain amount is deemed exempt (currently around $3,000). The wage exemption may be even higher.        

Like defenses to a levy, the exemptions are only effective if the bank or court knows about them. Banks may be required to check and see if funds deposited electronically are exempt. But it can’t hurt to make sure you do all you can to get the information to the bank or the court.  

Also, keep in mind that identifying exempt funds can get complicated if deposits from several different sources are combined in one account. This may lead the bank to make mistakes in identifying protected funds. Don’t assume the right funds will be levied upon and taken from your account. It might be useful to set up an alternate account where you can deposit all of your exempt funds to avoid the risk of confusion. 

Get Professional Help if You're Faced With a Bank Levy 

When faced with a levy on your account, seek advice from a local attorney who is familiar with both state and federal law. Laws applicable to bank levies vary from state to state, and the rules can change over time. Fighting a levy can be a complicated process, and it might be necessary to take your case to court. 

Finding an attorney can be difficult, but having the right attorney in your corner can make a big difference. As indicated, filing for bankruptcy puts a hold on collection efforts and gives you some time to work with a court in prioritizing or discharging your debts. If you decide to pursue bankruptcy, Upsolve can help you find the right attorney  

Let’s Summarize...

A bank levy is often a last-resort collection tool creditors use to collect outstanding debts. Most creditors have to go to court to get a money judgment before they can levy your account. When the bank receives the levy, it freezes funds in the account up to the amount of unpaid debt. 

You can protect your account funds if you have a good defense such as there was an error in levy documents or the statute of limitations has expired. You can also stop the levy, at least temporarily, by filing bankruptcy. Some funds may also be exempt from the levy, such as federal benefits and child support. The rules surrounding bank levies are determined by state law and can vary from state to state. 

Seeking advice from a local attorney familiar with your state and local laws can help you if you’re facing a bank levy.