Creditors Taking Money From Your Bank Account To Collect An Outstanding Debt

Can A Debt Collector Get Into My Bank Account?

You head to an ATM to withdraw $100 from your bank account. But you’re unable to get any of your money. You later find out your bank account has been frozen.

In many cases, a bank blocks your access to the account because a debt collector has obtained a court order against you. The court order requires the bank to freeze your account so the debt collector can recover money that’ll help cover your past-due debt.

If you find yourself in a situation like this—or you want to keep it from ever happening—read on so you can minimize or avoid the financial fallout of a frozen bank account.

How a Debt Collector Gets Access to Your Bank Account

A debt collector gains access to your bank account through a legal process called garnishment.

If one of your debts goes unpaid, a creditor—or a debt collector that it hires—may obtain a court order to freeze your bank account and pull out money to cover the debt. The court order itself is known as a garnishment. The court order normally comes after a debt collector sues you and then wins a judgment against you.

Debts that may be affected include credit card bills, auto loan payments, personal loan payments, medical bills and mortgage payments.

In addition to garnishing a bank account, a debt collector may be able to garnish your wages. This happens when a debt collector secures a court order requiring your employer to subtract wages from your paycheck to cover an unpaid debt.

Four states—North Carolina, Pennsylvania, South Carolina and Texas—don’t allow wage garnishment for consumer debt. If you live in one of those states, a debt collector can still essentially garnish your wages by garnishing your bank account, though. Once your wages are deposited into your bank account, they aren’t considered wages anymore. Therefore, a debt collector may be able to tap into your account and take your money—including money from your paycheck.

Can a Debt Collector Take Money From Your Account Without Permission?

Usually, a debt collector must obtain a court order before accessing your bank account. However, certain federal agencies, including the IRS, may be able to access your bank account without permission from a court.

How Much Money Can a Debt Collector Take From Your Account?

The amount of money a debt collector can take from your account depends on the state where you live.

In New York, for example, $2,664 to $3,600 in a consumer’s bank account is automatically protected from a garnishment for debt collection. In California, that amount was $1,788 as of September 2020; the sum is adjusted each year for inflation. Meanwhile, Delaware bans garnishment of bank accounts.

In several other states, a consumer can apply a “wildcard” exemption to garnishment of assets, which may include a bank account. According to the National Consumer Law Center, examples of these exemption amounts include:

• Florida ($5,000)
• Illinois ($4,000)
• Maryland ($6,000)
• Nevada ($10,000)
• North Carolina ($5,000)
• South Dakota ($7,000)
• Tennessee ($10,000)
• Virginia ($5,000 plus $500 per dependent)
• Washington ($2,000 of a $3,000 wildcard exemption can be applied to a bank account)

Aside from the original debt, a debt collector could take money to cover court-ordered fees and other costs.

What Can a Debt Collector Not Take From Your Account?

Many federal benefits can’t be taken through garnishment, except to pay delinquent taxes, alimony, child support or student loans. The laws in your state may determine which state benefits can be garnished.

According to the Federal Trade Commission, federal benefits that generally are exempt from garnishment (other than to pay delinquent taxes, alimony, child support or student loans) include:

• Social Security benefits
• Supplemental Security Income benefits
• Veterans benefits
• Federal student aid
• Military annuities and survivors’ benefits
• Benefits from the federal Office of Personnel Management
• Railroad retirement benefits
• Federal emergency disaster assistance

How to Open a Bank Account That Creditors Can’t Access

When it comes to garnishment, certain kinds of bank accounts may be out of the reach of debt collectors and creditors:

• In some states, a bank account jointly held by a married couple may be exempt from garnishment if the debt in question is owed by one spouse but not the other. However, if both spouses owe the debt, the account isn’t necessarily protected.
• An account opened at a bank in a state that bans account garnishments likely would be shielded from creditors. Keep in mind, though, that some banks may not let out-of-state residents open accounts.
• You may be able to safeguard money that you know is exempt from garnishment by keeping it in a bank account that’s separate from your other accounts. For instance, if you can prove that an account contains only Social Security benefits, you should be able to protect that money.
• In many states, some IRS-designated trust accounts may be exempt from creditor garnishment. This includes individual retirement accounts (IRAs), pension accounts and annuity accounts.
• Assets (including bank accounts) held in what’s known as an irrevocable living trust cannot be accessed by creditors. Creditors can, however, dip into a revocable living trust. As their names suggest, an irrevocable trust can’t easily be changed once it’s in place, while a revocable trust can easily be changed. People use a living trust as an estate-planning tool.

How Can I Protect My Bank Account From Creditors?

The consequences of a creditor’s garnishing your bank account can be harsh. Fortunately, you can take steps to prevent this from happening in the first place.

Don’t Let Debts Get to Garnishment Stage

Perhaps the simplest way to avoid garnishment of your bank account is to keep up with debt payments. But if that’s not an option, you might seek help from a nonprofit credit counseling service. A credit counselor may be able to block garnishment by working with your creditors on a plan to pay off your debts over time.

Respond to Lawsuits and Show Up in Court

Ignoring a lawsuit filed by a debt collector can make matters worse, perhaps leading to your bank account’s being garnished. If you respond promptly to legal action taken against you by a debt collector—this includes appearing at court hearings on the matter—then you might avoid a judgment against you and, ultimately, garnishment of your bank account.

What Happens if a Debt Collector Sues You?

If a debt collector sues you, be sure to respond right away, either on your own or through an attorney. This may involve submitting a written response or showing up in court, according to the Federal Trade Commission.

In addition, review your financial records regarding the debt, and read through the lawsuit. Look for any errors in the suit, such as an incorrect amount related to the debt you owe.

Having trouble figuring out the legal lingo and your next steps? You may want to seek the expertise of a legal aid service or an attorney.

How To Fight A Creditor’s Levy On Your Bank Account

Creditors and other lenders will try to recoup funds owed if you fail to make payments. If the situation escalates, they could take legal action and request a bank levy. If approved, creditors can freeze your bank account and take funds directly from your account. Your options are limited with a bank account levy in place. Below are some actions you can take if you find yourself in this situation.

What Is a Creditor’s Account Levy?

A bank levy is a legal action taken by private creditors, the federal government and other lenders and creditors. A bank levy freezes funds in your personal bank account and allows creditors to take funds to pay off your debt. A bank levy is a tool that creditors can use to recover the funds they are owed. Lenders will often find other ways to collect money before resorting to filing lawsuits.

How Does a Levy on a Bank Account Work?

A bank account levy is typically the result of a consumer’s becoming delinquent on payments for a debt. Depending on the creditor, the process could begin after one or more missed payments. To recoup its money, a creditor can file a lawsuit against you. The process could last several months or longer.

Once a lawsuit is filed, you should receive notification from the creditor. They also are required to provide the court proof that you owe the debt and have failed to make payments. Government creditors, like the IRS or the Department of Education, don’t need a court judgment to get approved for a levy.

If the court rules against you, the creditor will contact your bank with proof of the judgment and request a bank levy. Your bank will freeze any funds in your bank account and send the appropriate funds directly to the creditor. You won’t have access to your bank account until your debt is satisfied.

Missing payments also can damage your credit, since they are likely reported to the credit bureaus.

How To Fight a Creditor’s Account Levy

As mentioned, options are limited if a levy is placed on your bank account. If this happens, here are some steps you should consider.

Understand Your Situation

One of the first things you need to do after getting notice of a pending lawsuit is to familiarize yourself with your debt situation. Take time to review your debt account to ensure the information is correct. If the debt isn’t yours or the amount being claimed is incorrect, you could possibly fight a lawsuit or stop a bank levy.

If you’ve missed payments due to hardship, many creditors are willing to work with you. In most cases, they would prefer to receive payment in some form rather than pursue legal action. If not, you might be able to recover some of your money by filing for bankruptcy. Your options depend on where you live, so check local bankruptcy laws to see if you can exempt funds that have been levied.

If the levy isn’t in place yet, this is also a good time to review how much money is in your bank account.

Check the Statute of Limitations

Creditors can only legally collect a debt within a specific time frame. This is known as the statute of limitations. If too much time has passed, they may not be allowed to collect money via a bank levy on your account. Refer to state and local laws for more information on debt collection statutes of limitations.

Get Legal Help

Fighting a bank account levy isn’t easy. While you could try to do it on your own, your best bet is finding a local attorney familiar with this type of law. You may have cause to contest the creditor’s lawsuit. A lawyer can also represent you in any discussions with creditors moving forward.

Negotiate With Creditors

Many lenders and creditors would prefer to work directly with consumers to deal with outstanding debts instead of pursuing lengthy legal actions. Debt collection costs them both time and money. If you’ve missed payments, reach out to your lender or creditor to head off any lawsuits and work out a plan to settle your debt. You can still do this once a bank levy is in place, which could prevent a creditor from levying more funds from your account.

You could work with creditors to create a modified payment plan or receive other help, like a lower interest rate or access to hardship benefits.

You also can turn to credit counseling for help navigating your debts. A credit counselor can advise you on how to proceed or help you develop a specific debt management plan.

Open a New Bank Account

With a bank levy in place, you no longer have access to pull funds from your account. If you have any automatic payments set up, you’ll need to make alternative arrangements to pay those bills. One way to do this is to open a new bank account.

You should also stop using the account with the bank levy against it. If the bank still accepts direct deposits, those funds could be subject to the bank levy, too. Creditors can continue to levy your bank account until your debt balance is paid in full. You might need to resort to using money orders or cashier’s checks to pay your bills in the meantime.

Find the Option That Works Best for You

If a bank account levy isn’t in place yet, there’s still a chance to work with creditors to find an alternative arrangement to avoid legal action.

Once a bank levy is in place, it’s tough to fight and could lead to creditors’ completely wiping out your bank account. If you have outstanding checks, they could bounce. You will likely also end up paying fees to your bank to process the levy. Research your account and determine the best way to pay your debt, and work with the creditor.

Bottom Line

A bank levy can lead to a cycle of debt that’s difficult to recover from and may damage your credit for the long term. Before you find yourself defending against a bank account levy, it may make sense to work to pay off your debt using strategies like the debt snowball method or the debt avalanche method. You will nearly always have more control over your finances by staying in front of your debt obligations rather than finding yourself responding to legal or other action.