Can Debt Collectors Take Financial Aid From a Bank Account?

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.

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.

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.