If a creditor is after you for unpaid debts, you may be on the receiving end of a lawsuit. Your best course of action is to settle the issue by setting up regular repayments. You can appear in court as the defendant, but if you lose the case, the court will issue an enforceable judgment in the creditor's favor. The next step would be a lien on your property, garnishment of your wages or a bank account levy, which could reach out for your money with little or no warning.
How Levies Work
With a bank levy, a creditor can enforce a court judgment that awards monetary damages. The creditor has the court issue a writ of execution, which is then turned over to law enforcement. A police officer delivers the writ to the bank manager, who is obliged under the law to comply. You won't receive advance notice or warning, as this would give you a heads-up to withdraw the funds (you may receive a Notice of Levy after the deed is done). One day, the money's simply gone, and your options to appeal the levy will be quite limited.
In most cases, the bank will freeze the levied funds before actually turning them over to the sheriff. This gives you a brief opportunity to claim exemption from the levy. You may file a claim of exemption to tie funds up until the court can make a decision on the exemption. State and federal law sets the rules on exemptions; some funds by law cannot be seized to satisfy a court judgment. This includes Social Security retirement or disability payments, with some important exceptions, including the repayment of federally backed student loans.
If you have failed to make a monthly payment on a federally backed student loan for 270 days, you are considered in default. The entire loan becomes due and payable, and you become ineligible for forbearance (which is granted in the case of severe financial hardship). The lender will report the default to credit-reporting agencies, and the IRS as well as your state, can withhold tax refunds to repay the debt. In addition, you may be sued and can have wages garnished and bank accounts levied. Federal law also permits the seizure of Social Security payments, up to 15 percent of the total benefit; the law limits only these levies that would reduce your benefits to less than $750 a month, or $9,000 per year.
Some other forms of financial assistance may also be exempt, depending on state law. In California, for example, student aid and education grants are exempt from collection, as are unemployment and veterans benefits, private pensions, public assistance and health insurance benefits. However, if the money is deposited in a bank account and mingled with non-exempt funds, the bank may not be able to determine the source of the money, and allow the levy anyway.
Protecting Exempt Funds
If you are the subject of a creditor lawsuit or already have a court judgment outstanding, it's wise to separate your bank accounts according to the legal exemptions for your state. If you depend on Social Security benefits, for example, you should set up an account that takes deposits only from Social Security. This will allow you to limit the amount of money a lender can successfully reclaim with a bank levy.
- Sacramento County Public Law Library: Claim of Exemption From Levy
- State of California: Exemptions from the Enforcement of Judgments
- MoneyMattersNJ.com: Student Loan Debt and Default
- Consumer Financial Protection Bureau. "Can a Debt Collector Garnish My Bank Account or My Wages?" Accessed Dec. 5, 2019.
- Consumer Financial Protection Bureau. "What Is a Judgement?" Accessed Dec. 5, 2019.
- Internal Revenue Service. "What Is a Levy?" Accessed Dec. 5, 2019.
- Federal Trade Commission Consumer Information. "Garnishing Federal Benefits," Accessed Dec. 5, 2019.
- Office of the Comptroller of the Currency. "What Can I Do If My Bank Account Is Frozen and It Includes Social Security or Other Federal Benefit Payments?" Accessed Dec. 5, 2019.
- Office of the Comptroller of the Currency. "Are My Federal Benefits Automatically Protected By My Bank From a Garnishment Order?" Accessed Dec. 5, 2019.
- Internal Revenue Service. "What You Need to Know: The Federal Levy Payment Program," Accessed Dec. 5, 2019.
- Federal Trade Commission Consumer Information. "Coping With Debt: Self-Help," Accessed Dec. 5, 2019.
- Consumer Financial Protection Bureau. "What Is the Best Way to Negotiate a Settlement With a Debt Collector?" Accessed Dec. 5, 2019.
- Federal Trade Commission Consumer Information. "Coping With Debt: Debt Relief Services," Accessed Dec. 5, 2019.
- Consumer Financial Protection Bureau. "My Debt Is Very Old: Can Debt Collectors Still Collect?" Accessed Dec. 5, 2019.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.