Will Filing for Bankruptcy Stop a Levy?

If creditors are threatening to levy your bank account, you may be worried about how you are going to pay your bills and living expenses if a creditor takes your money. You may have been searching for ways that you can stop a levy when you came across information about bankruptcy filings.

Can bankruptcy stop a levy? Should you file a Chapter 7 case to stop a levy? What if you cannot afford to hire a bankruptcy attorney to stop a levy? Can you still stop a levy without a bankruptcy attorney?

All of these are important questions to be asking yourself. Let’s go over some important information about levies and ways you can stop a levy.

What Is a Bank Levy?

A bank levy is a powerful tool used by creditors to get money from you if you owe them a debt. Bank levies are a popular way for the IRS and other creditors to collect debts.

Your creditors do not have an automatic right to levy a bank account. A creditor must file a debt collection lawsuit and obtain a judgment before it can levy a bank account. The IRS typically sends numerous notices of the tax debt before it sends a Final Notice of Intent to Levy.

What Happens When a Creditor Puts a Levy on Your Account?

When a creditor or the IRS provides legal notice to the bank of its right to levy your bank account, the bank freezes the funds in your account. Your bank may or may not inform you before freezing the account so that you could try to stop a levy. You may learn about the levy when your debit card does not work.

You should have an opportunity to dispute the levy. Unfortunately, while you are disputing a levy, you may bounce checks and incur fees and expenses. If you decide not to dispute the levy or are unsuccessful in doing so, you still have options to get the levy removed.

How Can I Stop a Bank Levy?

• Pay the debt. This solution may not be possible if you are experiencing a financial hardship.

• Work out a payment agreement with the creditor. A creditor may negotiate a payment arrangement to stop a levy.

• Allege that the creditor made an error and should not be allowed to move forward until the matter is resolved. The creditor is required to follow certain laws before it can levy a bank account.

• Check to see if the statute of limitations has expired. A statute of limitations restricts the time a creditor has to collect old debt.

• Allege the funds in the account are protected. Some money in an account may not be subject to a bank levy. For example, Social Security payments, federal pension payments, and child support payments are usually protected from bank levies.

In an emergency, the best way to stop a levy may be a bankruptcy filing.

How Can Bankruptcy Stop My Bank Account From Being Levied?

When you file Chapter 7 or Chapter 13 bankruptcy, an automatic stay goes into effect. The automatic stay remains in effect throughout your bankruptcy case unless one of your creditors requests that the bankruptcy court lift the automatic stay, and the court agrees to do so. (This isn't very common.)

The automatic stay is powerful — it stops creditors and debt collectors from taking any action to collect on your debt. This can provide incredible mental relief for filers who've been under serious financial stress

In addition, if the debt is eligible for a discharge in bankruptcy, you get rid of the debt forever by completing your bankruptcy case. A bankruptcy discharge is issued at the end of a bankruptcy case and gets rid of your legal responsibility to pay the debt.

What Are the Downsides of Filing for Bankruptcy To Stop a Levy?

Bankruptcy can be a life-changing legal tool for people in serious financial distress. But, like anything, it comes with consequences, too. If you're thinking about filing bankruptcy to stop a bank levy, here are some things to consider first:

• You must include all your debts. You can't file bankruptcy on just one debt. All your debts must be included in your bankruptcy case. While you may want to get rid of some of these debts, a bankruptcy filing could negatively impact some debts, especially if you have a mortgage or car loan.

• The bankruptcy filing impacts creditors you want to continue paying. Your mortgage company and car loan company may stop sending you bills, automatically drafting monthly payments, and not allow you to make online payments after you file a bankruptcy case. They may take these actions even though you want to continue paying these debts.

• You could lose property in a Chapter 7 case. Though this isn't common, Chapter 7 can can put some of your property in jeopardy. Most Chapter 7 cases are “no-asset” cases, which means that all property is protected by bankruptcy exemptions or the value of the property was too low to make selling the property worthwhile for the Chapter 7 trustee.

  While the bankruptcy exemptions protect individuals filing in “no asset” cases, individuals who do have assets could lose unprotected property when they file for Chapter 7.

• The levy may continue after the Chapter 7 case ends. If the debt is not eligible for a discharge in bankruptcy, the creditor may continue with the levy after the bankruptcy case is complete. For example, child support, personal taxes, alimony, some personal judgments. Student loans require additional steps to discharge in Chapter 7. It's not impossible, but it's not as straightforward as getting rid of other unsecured debts.

Therefore, you may stop a levy by filing Chapter 7, but the relief may only be temporary. For some individuals, the temporary relief may give them time to find a way to pay the debt to avoid a bank levy. Before you file, it’s important to understand exactly what kind of debts you have that led to the levy and what restrictions they come with.