Bank Account Levy

Bank account levy summary:

• If you’re paying off a debt, a creditor can use a bank account levy to take money from your account. 

• A bank account levy is also called a bank account garnishment. 

• In most cases, a creditor needs a court order to levy your bank account. 

Bank account levy definition and meaning

A bank account levy is a legal action that allows a creditor to take money from your bank account to satisfy a debt. In most cases, the creditor must have a court order to levy a bank account. Federal agencies, however, can garnish bank accounts for things like unpaid tax debts or delinquent student loans without a court order. 

How long a bank account levy remains in place and how much money a creditor is allowed to take depends on the laws in the state where you live. If a creditor sues you, you may be able to avoid a bank account levy by negotiating a settlement or filing for bankruptcy protection. 

Bank account levy comprehensive breakdown

A bank account levy is a legal action creditors can take to collect unpaid debts. Creditors can use bank levies to collect on various kinds of debts, including credit cards, medical bills, and personal loans. The federal government can also use levies to collect on back tax debts or unpaid student loans. 

How a bank account levy works

A bank account levy works by allowing a creditor access to your bank account. To get that access, the creditor must typically first bring a debt lawsuit against you. If the court rules in favor of the creditor and issues a judgment against you, that opens the door for the creditor to seek a separate court order allowing them to levy your bank accounts. 

When your bank receives a court order for a levy, they're required to freeze your account. That means your ability to take money out is severely restricted. The creditor can take money out, but there may be a waiting period before the bank releases funds to them. Also, in some cases there are limits on how much the creditor can take.

Once the amount the creditor is entitled to is taken out, you'll have access to any remaining money in the account. If there isn't enough money in your account to cover the full amount of the levy the first time, the creditor can levy your account again until the debt is paid in full. 

In cases of federal levies from the IRS or other government agencies, a court order isn't required. 

Some assets are protected from bank account levies

A bank account levy isn't a free-for-all that allows a creditor to take everything you have. State law may require a creditor to leave a certain amount of money in your account or protect certain types of assets. 

Under federal law, a creditor can't levy:

• Social Security benefits

• Supplemental Security Income (SSI) benefits

• Military and veterans benefits

• Student loan disbursements

• Emergency aid payments from FEMA

• Federal, civil service, or railroad retirement benefits

If you have any of these kinds of benefits in your account, the money could be entirely or partly protected from being levied. You might have to provide proof of where the money came from.

How to stop a bank account levy

When a creditor sues you it's important to respond to the debt lawsuit promptly. Otherwise, you could leave yourself open to a judgment and then later, a bank levy. 

If a creditor has already won a judgment against you and you've received notice that your bank account will be levied, quick action matters. Here are some ways you might be able to challenge a levy.

• Check the statute of limitations. The statute of limitations is the amount of time a creditor has to sue you for an unpaid debt. It's worth a look to see if the statute of limitations has expired. If it has, you or your attorney could ask the judge to throw out the lawsuit and the court order allowing the bank levy.  

• Negotiate with the creditor. You could reach out to the creditor to work out a payment plan or resolve the debt. You'll likely need to make a strong case as to why the creditor should work with you instead of moving ahead with the levy. 

• File bankruptcy. Bankruptcy is sometimes the best option when you have debt you can't afford to pay. A bankruptcy petition can trigger an automatic stay, which could put a stop to a bank account levy. 

At a minimum, you may want to stop new deposits to your bank account. If the levy goes through, the creditor could take out any new funds you add. You might open a new account to hold future deposits while you decide how to deal with the debt.