If you don’t pay your debts, the money in your bank account could be at risk. To take your bank funds, most creditors have to first file a lawsuit against you and get a judgment from the court. Once the creditor has a money judgment, it can use a special collection procedure called “levying” (seizing) your bank account to get paid. Fortunately, certain benefits like Social Security are off limits from this process—at least to some extent.
Most creditors need to go to court and get a judgment against you before they can levy your bank account. Some creditors though, such as the IRS, can seize money from a bank account without first getting permission from a court. Before doing this, the IRS will send you a “Notice and Demand for Payment” (a tax bill). If you don’t agree that you owe taxes, call the number provided on the notice to discuss the situation with the IRS. If you can’t resolve the matter, the IRS will send a “Final Notice of Intent to Levy and Notice of Your Right to A Hearing” at least 30 days before seizing your account. After you receive the second notice, you can request a hearing with the IRS if you think the levy is inappropriate.
How a Creditor Gets a Judgment
If a creditor sues you and you don’t respond to the lawsuit, the creditor will win “by default.” Normally, the judge will award the creditor a judgment (a court order that you pay money to the creditor) that reflects what it asked for in the complaint (the court document that started the lawsuit). When debtors do respond to the lawsuit and lose, the creditor will get a judgment that, again, usually reflects the amount specified in the complaint. And if the parties settle, the judgment will reflect the amount that they settled for. In all of these scenarios, the victorious creditor will end up with a judgment that states the total amount of money you owe to the creditor. Once the creditor obtains the judgment, it can get a court order—called a “garnishment” or “attachment”—requiring your bank to seize the money in your bank account.
What Happens Next
Once the bank receives the court order, it freezes (places a hold on) the funds in your bank account up to the amount of the judgment—possibly all the money you have in the account. You won’t be able to withdraw that money or use the funds to cover checks you’ve written.
Next, you’ll get a notice that the creditor has levied your bank account. The “Notice of Levy” will likely state that “certain property, owned by you, or owed to you, is being held or taken to pay the claim of the creditor.” The notice will describe the property (the bank account) and will also explain how you can claim any exemptions that will allow you to keep some or all of your money. You should then determine which funds, if any, are exempt from seizure (see “Exempt Funds,” below).
The bank will eventually send any non-exempt funds to the creditor to pay off the debt.
A creditor cannot seize “exempt” money. A U.S. Department of Treasury rule requires your bank to protect certain federal benefits—for example, Social Security or veterans’ benefits in most cases—from creditors. (Also, your state laws may provide protection against seizure for money you have in a bank account.)
Under the Treasury rule, the bank must protect two months’ worth of federal benefits from seizure. (However, if the garnishment order is to collect child support or federal taxes, the bank can freeze the funds, even if they come from Social Security.) Theoretically, this protection is automatic when the government sends you benefits through direct deposit, because the bank will have a record of all such deposits and federal law requires the bank to look for them. In theory, it shouldn’t matter whether the funds are in their own, separate account, or co-mingled with other monies. For example, suppose you receive $500 in Social Security each month through direct deposit into an account that holds $7,000. If you owe $10,000, the creditor can seize $6,000 from this account (the creditor will have to look elsewhere to make up the rest).
The process of sorting out funds can be complicated if you’ve co-mingled your money by putting both exempt and non-exempt funds in the same bank account. When you know that a creditor has a judgment against you, it’s a good idea to plan ahead and keep exempt funds in a separate account.
If you receive your benefits by paper check, or if you transfer the funds into another account after an initial direct deposit, the bank won’t automatically protect your money. You’ll have to go to court to prove that the funds are protected federal benefits that the creditor can’t take.
If you already have a judgment against you and you want to avoid a bank account seizure, consider contacting an attorney. You can also seek help from a legal aid office or legal clinic in your area.
Questions for Your Attorney
- Can the bank freeze my account without letting me know beforehand?
- Is my Social Security exempt if I owe back taxes or child support?
- Will the bank notify me if it automatically protects my federal benefits?