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A levy on bank account funds is a debt collection approach used by creditors that are owed a long-standing unpaid debt. It lets creditors pull money directly from your bank account without your permission in order to satisfy the debt.If a creditor levies your account, the bank must freeze the funds in your account and send the amount owed to the creditor. You typically can’t access the money in your account until the debt is paid and the levy is lifted.Fortunately, creditors generally have to jump through several legal hoops to levy your bank account. In addition, there may be ways you can protect some or all of your money even if your account is levied. Here’s what you need to know about bank levies.
What Is a Levy on a Bank Account?
A bank levy is a process that a debt collector uses to legally take money from your checking or savings account without needing your approval.Generally, a private creditor (like a credit card company) must sue you in court and win a money judgment before they are able to levy your bank account. Since this requires time and money (and they don’t know your account balance before heading into the levy process), creditors will typically only use a levy until they’ve exhausted all other ways to collect the unpaid debt. Certain creditors, such as the Internal Revenue Service (IRS) and Department of Education, however, can enforce a levy on a bank account without first going to court.
How Do Bank Levies Work?
Creditors can’t simply go straight to your bank and demand your funds because you’ve missed a few payments. There are several steps required before creditors can levy a bank account. First, the creditor will typically need to file a lawsuit and prove to the courts that you owe the debt. The creditor also has to notify you at this point, which will give you a heads-up that a bank levy could be coming down the road.If the creditor successfully gets a court judgment against you, it has access to stronger methods for collecting your debt, including a bank account levy. To initiate a levy, the creditors will need to present documents to your bank. The bank will then freeze the money you have stored in your checking or savings account. Deposits can continue to go into the account, but no withdrawals are allowed. Barring any exemptions or disputes you file against the levy (more on that below), the amount owed is taken from the account and given to the creditor. If there are insufficient funds, the levy and freeze can remain until the remaining debt is paid.Recommended: How to Get Out of Debt
How Much of Your Bank Account Can Be Levied?
Depending on the laws in your state, a creditor might be able to take the full amount — which includes the original debt, interest charges, plus court and legal fees — from the account. They can’t, however, take more than the amount stated in the court order. If there isn’t enough in the account to cover the debt, the levy can remain until the remaining debt is paid. Recommended: Can You Overdraw a Savings Account?
Can You Stop a Levy From Occurring?
You typically have an opportunity to dispute a levy. This can stop the levy from occurring or reduce the amount of money creditors can pull from your checking or savings account. However, you have to act quickly. The time limit to object varies by state, but you generally have 10 days or less to file the paperwork. If you take no action, a creditor could potentially empty your account, which may make it difficult to pay essential expenses. You could wind up bouncing checks and/or paying late fees to service providers.
How Can You Fight a Levy on a Bank Account?
There are a few ways you may be able to fight or limit a bank levy against your account. Laws vary from state to state, so your best bet is to consult a local lawyer. Some possible approaches include:
Claiming an exemption. If the funds in your account are considered exempt from collections, you can file an exemption to prevent that money from being levied. For example, government benefits (such as Social Security and federal employee pensions) are generally protected. Money you’ve received from child support payments may also be exempt from collection.
Prove the creditor made a mistake. If you don’t think the debt is yours or believe the amount is wrong, you can send a debt validation letter via certified mail. In the letter, you’ll want to say that you are disputing the debt’s validity and want to see documentation that shows the debt is yours. If you’ve paid the debt that they are claiming you still owe, be sure to include proof of payment, such as a receipt or statement.
Prove your identity was stolen. If the debt was a result of identity theft, you can fight the levy by proving that someone else received the borrowed funds. To do this, you’ll need to submit an identity theft report (which you can get by reporting the identity theft to the Federal Trade Commission). You’ll also want to file a police report and submit that along with your identity theft report.
Check the statute of limitations. Creditors have a certain time frame (called a statute of limitations) during which they can legally collect debt from you. You can check your local laws or consult a lawyer to find out what the statute of limitations is for the type of debt you owe. If the window has closed, you may be able to stop the levy.
File a hardship claim. You may be able to contest a levy imposed by the federal government (such as the IRS) if it poses a financial hardship that threatens your ability to pay for basic needs, like housing, food, and essential utilities.
File for bankruptcy. Though this is something you would only consider as a last resort, you may be able to recoup some or all of the levied funds if you file for bankruptcy immediately. Laws vary by state, so you would want to consult a bankruptcy attorney in your area to find out how bankruptcy would impact your bank levy.
Creditors and lenders that have been awarded a court judgment in their favor can use a bank levy as a way to collect an unpaid debt. Some government agencies, such as the IRS and the Department of Education, can also place a levy on a bank account, and they don’t need to get a court judgment in order to do so. This means the federal government can use a bank levy to collect on a student loan. However, the government is required to give you plenty of notice. For example, the IRS must mail you a final notice of intent to levy at least 30 days before it serves a tax levy on a bank.
Can You Open Another Bank Account if Your Account Is Levied?
Yes. You’re not barred from having personal bank accounts and can open another account despite an active bank levy. Opening a new bank account can help you stay on top of your bill payments and avoid falling behind on other financial obligations. Be sure to move any automatic bill payments you have on the levied account to the new account so you don’t miss any upcoming payments.
How Long Do Bank Levies Last?
Bank levies typically remain on an account until the debt is paid or the levy is lifted. To remove the levy, you typically must either pay the debt in full or show that the funds in the account are exempt from the levy. Unfortunately, a levy can be used more than once, even on the same account. If sufficient funds aren’t available on the creditor's first attempt, they can retry as many times as needed to repay the debt.
The Takeaway
Having a credit or tax levy on your bank account can put you in a difficult financial position. However, consumer protections provide options to either dispute, reduce, or negotiate a bank levy. To be successful, though, you’ll need to take immediate action. It can be a good idea to discuss your options with a debt counselor or debt attorney.If you’re currently looking for a new bank account, Lantern by SoFi can help. With Lantern by SoFi’s online banking marketplace, it’s easy to compare high-yield savings accounts based on annual percentage yield (APY), fees, and balance minimums. Lantern can help you compare online savings accounts and find today’s best rate.
Frequently Asked Questions
What does a levy on a bank account mean?
How do I remove a levy from my bank account?
How long does a levy stay on your bank account?
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About the Author
Jennifer Calonia
Jennifer Calonia is a Los Angeles-based finance writer who has covered the gamut, including student loans, credit card rewards, consumer loans, and debt. Her work has been featured in outlets like Bankrate, NerdWallet, Business Insider, Yahoo Finance, and U.S. News.
