Bank account seizures may seem more common than they really are. There are rules to follow if someone wants to take money from your bank account. You can take steps beforehand to make this less of a threat.
Know how and when your bank accounts may be within a creditor's reach. You can then take action, manage your debts, and keep your creditors content and account balances in the black.
Who Is the Account Holder?
A collector trying to get money out of your bank account will have a difficult time taking money from any account that isn't in your name. State laws vary widely on the power of creditors to reach funds in a joint account.
In some states, creditors can reach the entire balance of a married couple's joint account, for example. Some laws look to each account owner's deposits. Some states have joint tenancy laws to protect a married couple's bank accounts from creditors unless both husband and wife are responsible for a debt.
Even if the bank account is solely in your name, some funds are exempt from debt collection under state or federal law. The reason is to allow people to preserve funds to meet their basic needs.
Exempt funds keep their status as exempt when you put them in a bank account and they stay readily available for use. Exempt funds can lose that protection if you convert them into a "permanent investment."
Sources of Exempt Funds
Although it varies by state, exempt funds would typically include:
- Most government benefits, including Social Security, unemployment insurance, veterans' benefits and public assistance
- A percentage of your earned wages, which varies by state
- Alimony or child support payments, and other payments for the support of a dependent
- Proceeds of the sale of property that is exempt from collection, such as a homestead exemption
- Disability or unemployment benefits from your employer
- Workers' compensation
- Retirement benefits, such as pension or annuity payments
- Amounts received due to a wrongful death claim or from life insurance
- Payments due to personal bodily injury, in an amount that varies by state
- Proceeds of guaranteed student loans
Wildcard Exemptions and Your Choice
Some states allow you a wildcard exemption of property or cash to be used as you see fit so you don't lose all of your money. So if you're forced to disclose your assets in a post-judgment procedure (sometimes called supplemental proceedings or citation to discover assets), tell the debt collector funds are protected as exempt or as a wildcard exemption.
You'll also want to write a letter to the bank ahead of time to let them know that all the funds in a particular account are exempt.
When the bank receives a notice from the debt collector, the bank must freeze nonexempt funds. This means you can't withdraw the money or use it to pay checks you've written. Act quickly to make alternate payments if you have checks out that could bounce.
When you receive notice that your account has been frozen, respond with written notice to the bank and creditor about exempt funds. It's best if you can show all funds in an account are exempt.
It can be complicated if you have mixed or commingled exempt and nonexempt funds. When you know there may be a judgment against you, try to plan ahead and keep exempt funds in a separate account.
Protecting Your Exempt Assets
Separate Exempt Funds
Planning to protect exempt funds is a good idea and can save you time and effort if there's ever a judgment against you. Designate accounts for your exempt funds, and immediately inform the bank and creditors of that status if collection efforts begin. If the account is nonetheless garnished or set-off, you may have a legal claim against the creditor for wrongful garnishment.
Act Quickly on Frozen Funds
Many courts allow you a formal hearing to explain why the frozen funds shouldn't be seized or garnished. Check the seizure notice for instructions to challenge the seizure or with the clerk of the court where the judgment was entered. Act quickly to restore access to your accounts and minimize consequences such as bounced checks.
It's important to provide detailed documentation that the funds in the account are from entirely exempt sources. For instance, you might provide:
- Bank deposit slips
- Statements from government benefit agencies
- Statements from insurance companies
- Real estate closing statements
- Pension or annuity statements
- Bank account statements and registers
- Any other documentation to trace the source of funds as exempt
It's best to provide the detailed documentation to the debt collector and the court ahead of time, in as clear a manner as possible.