What a bank levy is and how it works

If a creditor or debt collection agency successfully sues you for an unpaid debt, the court may place a bank levy on your account. This would allow the creditor to directly withdraw the money you owe.

Because creditors have to jump through quite a few hoops to get a court to place a levy on your account, bank levies are typically considered a last resort for collecting an unpaid debt.

Bank levies: The basics

A bank levy is a legal action taken by a creditor to obtain funds directly from a bank account to recover unpaid debts or taxes owed by an individual or business. In most cases, bank levies are put in place by a court order. Before the court will grant a bank levy, the creditor or debt collection agency must sue you in court for the unpaid debt and win.

Creditors can request a bank levy for debts such as unpaid credit card debt, personal loans and medical bills. In addition, some government agencies — such as the Internal Revenue Service (IRS) and the U.S. Department of Education — can levy your account for unpaid tax debt, student loan deb or other debts to the government. These government agencies may even be able to levy your bank account without a court order — although by law they must give you advanced notice.

Not all funds can be subjected to a bank levy. For example, federal law exempts the following funds from bank levies:

• Social Security benefits
• Supplemental Security income
• Veterans benefits
• Student loan disbursements
• Federal Emergency Management Agency (FEMA) aid
• Federal, civil service or railroad retirement benefits
• Child support payments

In addition, your state laws may require creditors to leave a minimum amount of money in your bank account. After all, you will still need to pay your regular expenses while the levy is placed on your account. Check with your state’s laws to find out if a portion of your funds are protected. For example, Maryland state law requires creditors to leave at least $500 in the levied account.

Note that with IRS levies, you may be able to have your bank levy released if you can prove that the loss of funds is causing “an immediate economic hardship.”

However, the potential release of an IRS bank levy does not mean that your debt disappears. It only means that your accounts will be unfrozen and that you will have to make arrangements with the IRS to begin repayment of taxes you owe. To learn more about IRS Bank levies and how to request a hardship release, you can read IRS Publication 594.

How bank levies work

Unless the creditor is a government agency that can levy your account without first suing you, there are several steps to the process.

Step 1: Collection attempts

Typically, a company will not take you to court for an unpaid debt unless it has first tried other methods of collection. The creditor will likely first send you written collection letters and make collection calls to your home and workplace.

The creditor may use a debt collection agency. Sometimes these companies attempt to collect on the original creditor’s behalf — taking a cut of the recovered money as payment. Other times, debt collection agencies may purchase your debt from the creditor for a lower price and attempt to recover and keep the original amount owed.

Step 2: Lawsuit and judgment

Most creditors must file a lawsuit against you before getting a court order for a bank levy. If you lose the lawsuit, the court will issue a money judgment, an order that states how much you legally owe. You may be able to appeal the judgment for a lower amount.

Step 3: Bank levy

Once the money judgment has been granted, the creditor becomes a judgment creditor. They can then file legal documents with the court to receive an order for a bank levy on your accounts.

Once the court order has been granted, the creditor must notify the bank of the levy. The bank will then freeze the account, preventing you from making any withdrawals. The creditor can take the funds necessary to satisfy the money judgment. If there aren’t sufficient funds in your account to repay the debt, the creditor will make several withdrawals until the debt is satisfied.

Regardless of the type of debt, the bank usually has to wait 21 days after a levy is received before surrendering your money. During this gap, you may want to contact an attorney, preferably one who will give you a free consultation on your options, including bankruptcy. You can usually find free or low-cost help by contacting your local bar association or searching the National Legal Aid and Defender Association (NLADA) database.

How long bank levies last

Typically, bank levies last as long as it takes for the unpaid debt specified in the money judgment to be satisfied.

Although some debts are so old they are beyond their statute of limitations, that doesn’t stop debt collectors from pursuing them. Different states have their own statute of limitations procedures on different types of debt, so you should find out your state’s rules regarding the type of debt you have.

If a debt causing a bank levy is old enough that it should not be pursued, you may be able to get a lawyer involved and halt the process.

How to stop a bank levy

Bank levies are best avoided altogether. However, you can take some steps that may help you stop a bank levy and unfreeze your account.

• Prove that the creditor made an error. Creditors make errors just like anyone else, and a bank levy may have been wrongfully placed on your account. If the debt isn’t yours, the amount is wrong or the debt resulted from identity theft, you can fight the bank levy in court. You may also be reimbursed for bank fees.
• Negotiate with the creditor. Try to negotiate with the creditor, suggesting either a repayment plan or a settlement offer for less than what you owe. For example, the IRS may put you on a payment plan to help you pay back taxes.
• See if the debt is beyond the statute of limitations. If the debt is so old that it’s beyond the statute of limitations in your state, you can dispute the bank levy and have it removed.
• File for bankruptcy. Filing for bankruptcy can be a smart option if you’re overwhelmed with your finances and can’t seem to get back on your feet. However, not all kinds of debt can be cleared with a bankruptcy filing. A bankruptcy attorney can help you figure out what your options are.
• Stop using your bank account. If a bank levy is in place and the creditor is able to keep withdrawing money, then you may want to stop adding money to the account until the situation is resolved. This won’t stop the bank levy, but it will limit the amount of money creditors can collect from you while you figure out your next steps.

How else can a judgment creditor collect on a debt?

Not all debt-related lawsuits result in a bank levy. Once the court has issued a money judgment, the creditor can use other methods to claim the funds.

Wage garnishment

The creditor may garnish your wages, which means they can levy a portion of your paycheck. With wage garnishment, the creditor can require your employer to send a percentage of your wages until the debt is satisfied. In most cases, this also requires a court order.

The amount a creditor can demand varies depending on the type of debt, as well as federal and state laws. Under federal law, the amount is usually capped at 25 percent.

Liens

The creditor may also put a lien on your property in an attempt to recover unpaid debt. Once there is a lien on your home, the creditor can force you to sell it through the foreclosure process. Or they can wait until you sell your home voluntarily — and then claim their owed amount from the proceeds.

Seizure of personal property

The creditor may be able to receive a writ of execution from the court. This legal order allows them to seize your personal property, such as cars, recreational vehicles, boats and other valuables. They are not allowed to take nonphysical assets such as retirement accounts, Social Security benefits, and disability benefits.

The seizure may be carried out by a sheriff or other local official, who will then sell the assets at auction. The proceeds from the sale will go toward satisfying the debt.

The bottom line

Bank levies are last-resort options for collecting unpaid debts. They involve freezing the funds in your bank account so creditors can withdraw the amount you owe.

Luckily, bank levies don’t happen overnight: Government creditors must give you advance written notice, while businesses typically must first sue you in a court of law.

This means you may have time to dispute the levy or negotiate with the creditor for a payment plan or lower amount. In addition, you may be able to file for bankruptcy to avoid the bank levy.

Frequently asked questions

• Who can request a bank levy?
  

  Any creditor to whom you owe an unpaid debt may request a bank levy. Typically, private businesses such as debt collection agencies must first successfully sue you for the debt in a court of law. However, government agencies may be able to place the levy without a lawsuit.

• How long do bank levies last?
  

  Usually, bank levies last as long as it takes for the debt to be satisfied. However, your state may place a statute of limitations on how long a creditor can attempt to collect a debt. Check your state’s laws.

• Can you stop a bank levy?
  

  You may be able to delay or stop a bank levy altogether by proving that the debt is erroneous, negotiating a payment plan or lower amount with the creditor, or filing for bankruptcy.