If a creditor is taking legal action to recover debt you owe, it can enact a levy and freeze your bank account so it can withdraw funds. If your account doesn’t have enough in it to cover that debt and you have direct deposits going in, the creditor can keep taking money from it until your debt is paid. Most creditors need to get a court order to levy your bank account but some federal organizations, like the Internal Revenue Service, can simply send you a letter letting you know it will levy your account if you don’t pay in full.
If you’re concerned about a creditor interfering with your bank accounts, here’s what you need to know about how to stop automatic withdrawals from your bank account due to a levy or garnishment.
Options for Stopping a Bank Levy
So, what is a levy? A bank levy, also known as a bank garnishment, occurs when a creditor files a document — a writ of garnishment or writ of execution — and sends it to your bank and local law enforcement. Bank levies begin in the courtroom when a judge determines a creditor has the right to collect money from you for a past-due account. To recover debt, government agencies typically use levies, and private creditors use wage garnishments.
A creditor can continue filing levies until you repay the amount you owe. In addition to paying off your debt, you will incur a bank levy fee. If you think you’ve been wrongfully subjected to a bank levy or if it will cause you economic hardship, you do have some options to stop it:
- Bank levy reversal: If the IRS is garnishing your bank account, you have 21 days to get help to reverse the levy. You can work with a tax professional or attorney to protect your money and have the IRS return any funds it has already taken.
- Settlement negotiation: If you can’t reverse an IRS or other creditor’s bank levy, you can try to settle the debt. Consider working with a debt relief counselor to put together a payment plan proposal or settlement amount offer.
- Hardship plan: If you have a tax liability with the IRS and paying it will cause you immediate economic hardship, you might be able to get the levy released by following the IRS appeals process. If you’re successful, you’ll have to make payments to pay off your balance. You might also be able to declare hardship by filing bankruptcy — under Chapter 13, the debt becomes part of your repayment plan and is not subject to garnishment.
- Partial payment or installment plan: If you notify the IRS or creditor that you’re unable to pay your debt and you have no money in your account to seize, you might be in a better position to set up a payment plan. In some states, if you can’t pay your tax bill, you can make an offer in compromise, or settlement offer, to pay your debt.
Bank Account Garnishment Laws and How the Bank Levy Process Works
The levy process typically starts with the court entering a judgment against you and issuing an order to garnish your bank account. The creditor sends the garnishment order to your bank, and your bank is required by law to freeze your account for a specified period of time, which means you cannot withdraw funds from it.
If you owe more than the amount you have in your bank account and you have direct deposits being deposited, the bank has the right to pay your creditor with those funds until your account is paid in full. This could wipe out your bank balance or leave you with an outstanding debt.
Find Out: 7 Tips for Paying Off Back Taxes
In some states, you’ll receive a notice of levy when the judgment is issued, but it can also happen without notification. If you’re notified, contact an attorney and follow the instructions on the garnishment notice — make sure you inform the judge if you have any bank levy exemptions. For instance, if you’re receiving state benefits — such as a public assistance, workers’ compensation or retirement benefits — you might be eligible for an exemption.
Unless you claim an exemption within a certain period of time, the bank will freeze the funds and give the money to the sheriff. Even though some of your funds might be exempt from a levy, the judgment will remain in effect and accrue interest each year until you pay off your balance. The amount of interest and time you have to claim your exemption varies by state.
Claiming Bank Levy Exemptions
You can stop an IRS garnishment or the bank levy process if your funds meet certain requirements. Bank levy laws vary by state, but the following federal benefits are exempt from a bank levy, according to the Federal Trade Commission:
- Social Security benefits
- Supplemental Security Income benefits
- Veterans benefits
- Civil service, federal retirement and disability benefits
- Military annuities and survivor benefits
- Student assistance
- Railroad retirement benefits
- Merchant seamen wages
- Longshoreman and harbor worker death and disability benefits
- Foreign service retirement and disability
- Compensation for injury, death, or detention of employees of U.S. contractors outside the U.S.
- Federal Emergency Management Agency federal disaster assistance
Bank Account Garnishment Laws by State
Figuring out bank levy laws by state can be tricky, so it could be worthwhile to work with a professional. Some questions you might want to ask a lawyer or financial advisor include:
- How can I get my levy released?
- What happens when I pay off my debt?
- How long does a bank levy last and what does notice of levy mean?
In some states, certain sources of money in your bank account are exempt from garnishment. For example, in Colorado, 75 percent of wages and 100 percent of disability, unemployment, Social Security benefits and other types of funds are exempt from creditors’ levies. In other states, you might be able to protect your bank account from garnishment if you receive SSI, veteran or other federal benefits. Some states provide “wild card” exemptions up to a certain dollar amount, which typically ranges from $500 to $10,000.
Make sure you get professional advice regarding the bank levy laws in your state and how a writ of execution on your bank account will affect you. A lawyer can increase your chances of stopping a bank levy, but you have only 10 days after your bank account is frozen to file an exemption, so don’t waste time — find help immediately.
Joint Account Levies
If you share a bank account with a spouse who doesn’t owe money to a creditor, he’ll also be subject to a bank levy if you fail to pay your debt. Creditors can generally garnish a joint account for the full balance but in some states, your spouse’s funds might be protected.
If you can prove that all the funds in the account are your own contributions — such as your paycheck, government pension benefits or even insurance payments — the other account holder might not be held responsible for paying the balance.