A bank levy occurs when a bank account is frozen because a creditor is trying to get the debtor to repay debt. A bank levy can occur due to unpaid taxes or debt. The IRS uses bank levies the most, but other creditors can use them to force repayment of debt.
Failing to repay your debt could land you in court if your creditors decide to pursue a civil claim against you, or they could take additional legal action to garnish your wages or enact a bank account levy. A bank account garnishment can lead to even more money woes if you don’t have enough cash to cover your bills.
Related: How to Negotiate Credit Card Bills
What Is a Bank Levy?
It’s important to note that a bank account garnishment — more commonly referred to as a bank levy — is different from a wage garnishment. When your account is subject to a bank levy, the money in that account is frozen and then taken by a creditor, like your credit card company, auto loaner or the IRS.
With a wage garnishment, the creditor takes some of your earnings directly from your employer and out of your paycheck; it does not directly affect your bank account.
Government agencies like the IRS and other revenue-collecting federal agencies are the most common users of bank levies. Credit card companies and other private creditors can execute a levy, but because they must first get a court order before they can access your bank account, you will receive notice of an impending levy before other actions are taken.
Bank Account Garnishment Laws and How the Bank Levy Process Works
The rules for enforcing a bank account garnishment vary from state to state, but the process typically works the same way. After a judgment is entered against you, the creditor has to file a separate document to initiate a bank account levy.
The document, often called a writ of garnishment or writ of execution, must include your contact information, the name and address of your bank and the amount that’s to be garnished. The creditor is responsible for giving law enforcement a copy of the writ so it can be served to your bank.
Once the bank receives the garnishment order, it’s required to freeze your bank account up to the amount specified by the court. This means that if you owe $5,000 but your account only has $2,000 in it, all of your cash can be frozen.
You then have a specific amount of time — 21 days, if the levy comes from the IRS — to challenge the bank levy or claim exemptions for certain assets. If you fail to respond to the bank account garnishment order or you don’t have any bank levy exemptions to claim, the bank will turn over the funds in your account once the waiting period ends.
A bank levy is not necessarily a one-time event. Accounts that don’t have enough money to cover the full amount of the garnishment might suffer another writ by the creditor for the remaining balance later on. So after the creditor has garnished the $2,000 that was in your bank account, they can come back and file another levy, and another — until you have repaid the $5,000 you owed.
On top of this, most banks charge a bank levy fee to customers whose accounts they have to garnish.
Claiming Bank Levy Exemptions
Certain deposits are exempt from bank account garnishment under federal law. Here’s a list of what is exempt from a bank levy, according to the Federal Trade Commission:
- Social Security Benefits
- Supplemental Security Income (SSI) Benefits
- Veterans’ Benefits
- Civil Service and Federal Retirement and Disability Benefits
- Military Annuities and Survivors’ Benefits
- Student Assistance
- Railroad Retirement Benefits
- Merchant Seamen Wages
- Longshoremen’s and Harbor Workers’ Death and Disability Benefits
- Foreign Service Retirement and Disability Benefits
- Compensation for Injury, Death or Detention of Employees of U.S. Contractors Outside the U.S.
- Federal Emergency Management Agency Federal Disaster Assistance
If your bank account contains any of these types of benefits, you must claim bank levy exemptions with the court that issued the garnishment order. Generally, you’ll need to provide a check stub or bank statement to prove your claim.
Bank Levy Exemptions: Nuances by State
Bank account garnishment laws vary by state. In addition to federal bank levy exemptions, each state also protects certain types of income from creditors. Depending on where you live, you might be able to exempt workers’ compensation benefits, unemployment benefits and any child support or alimony payments you receive. You might also be able to claim a hardship exemption if you can prove that the garnishment would put you and your family into a dire financial situation.
Because the law around what types of state benefits are subject to and exempt from garnishment is different from state to state, it is best to get more information by contacting someone local, such as an attorney who practices in your state, your state or local consumer protection agency or a legal aid office in your area.
How to Stop a Bank Levy
If you feel the levy on your bank account is incorrect or is causing economic hardship, there are some routes you can take to stop the bank levy. Let’s take a look at some options to see what might apply if your account is being levied.
Bank levy reversal: If you’ve been served with a bank account levy notice, you might be able to stop the levy by getting the order reversed if certain circumstances apply. For example, you can file a motion with the court to vacate the judgment if you can prove that you were never properly served with notice of the original lawsuit. You might also be able to get the judgment vacated if you were aware of the court date, but circumstances beyond your control prevented you from appearing.
Try contesting the judgment if you believe the debt is outside the statute of limitations. Each state sets a specific time frame on how long a creditor has to sue you for a debt. If the statute of limitations has already expired, you still owe the debt but the creditor can no longer take any legal action against you to collect.
Settlement negotiation: If you don’t have grounds for reversing the bank levy, you can still attempt to negotiate a settlement with your creditor before the bank account garnishment is executed. As a final option, filing for bankruptcy will halt any court proceedings, including a levy.
Hardship plan: There might be instances where you will qualify for a hardship plan. If your bank account is subject to a levy from the IRS and it’s causing immediate economic hardship — preventing you from meeting basic and reasonable living expenses, for example — the levy might be released. Once you’re approved for this release, a payment plan will be set up so you can pay off your balance.
Partial payment plan: If you can prove that you do not have the necessary funds to make the required payments that exist with an installment agreement from the IRS, you might qualify for something similar to an installment plan where you make monthly payments on a sum that is less than the original amount owed.
Bank Account Garnishment of Joint Accounts
If you think your joint account is safe from bank account garnishment, you could be in for a nasty surprise. A creditor can garnish a joint bank account, regardless of whether both account owners actually owe the debt.
It’s up to the non-debtor account owner to prove what portion of the money belongs to him and to claim any applicable exemptions. Accounts belonging only to one spouse are generally protected, although community property states, such as Texas, allow an exception for certain types of debt. If you’re concerned about a possible bank levy garnishment of a joint account, it might be wise for you and your spouse to establish separate bank accounts.
If you are being subject to a bank levy in New York, for example, any account with your Social Security number linked to it is eligible for garnishment. Debt-relief attorney Leslie Tayne of Tayne Law Group said that this would include your parents’ bank accounts (as adult children sometimes manage their aging parents’ finances), your children’s accounts (e.g., custodial accounts) and organizations’ accounts (e.g., if you help handle bank tasks for your church or synagogue).
A bank levy can wreak havoc on your finances and create unnecessary stress for you and your family. Defend yourself from this creditor attack by enacting the right exemptions to help minimize the damage.