Can Creditors Seize My Federal and State Refund?

by Lynndee Marooney ; Updated July 27, 2017
Creditors can garnish your bank account and take money, including your tax refunds.

Only three government agencies can take both your federal or state tax refunds to satisfy an unpaid debt: the Internal Revenue Service, your state revenue service, and the U.S. Department of Education. Each of these creditors must first notify you of the pending action. If you owe a different type of creditor, they might still garnish your tax refunds using a slightly different method.

Seizing the Refund

Any creditor can go to court and ask for a judgment. When granted a judgment, the creditor can garnish any funds in your bank account. While creditors cannot directly take your tax refunds, they can legally seize the money in your bank accounts. Therefore, when you deposit your tax refund into your bank account, the creditor can take the money by contacting the bank and completing the proper paperwork. Most banks will notify you before withdrawing the funds. It is very hard for a creditor to predict when a tax refund will hit a bank account, making it a gamble whether the creditor can actually seize your refund money.

What is a Judgment?

A judgment is a court order granting the creditor the right to collect on a debt. To get a judgment, the creditor must file the proper paperwork with the court and must serve you notice. The notice gives you the right to appear in court to defend your case. Once the court grants a judgment, it will appear on your credit report, and the creditor can move forward to take money from you rather than requesting payment. The judgment gives the creditor the right to contact your place of employment to garnish a percentage of your paycheck, or contact your bank and withdraw the money owed from your accounts. Before any creditor can even try to garnish your check or bank accounts, he must have a judgment.

Is There a Time Limit on a Judgment?

The statute of limitations (SOL) on debt in your state places time limits on how long a creditor can take to seize the money in your bank account. The creditor can renew a judgment for an additional time depending on the state. All judgments have a maximum SOL. Visit Bills.com to find the SOL for your state (see Resources). Once the judgment has passed the SOL, the creditor cannot seize any of your money through any means.

Stopping the Garnishment

The only way to stop the IRS or Department of Revenue from garnishing your federal or state tax refund if granted a judgment is to file for bankruptcy. Bankruptcy will clear or reduce your debt if the court approves your case. Bankruptcy rarely results in discharged student loans. The moment you file your bankruptcy petition, all creditors must cease collections actions – this includes garnishing your tax refunds. Bankruptcy is a legal process that has serious consequences; you should never decide it lightly. Discuss your options with a local bankruptcy attorney. You can avoid having other creditors take your tax refund by not putting it into your bank account.

About the Author

Living in Denver, Lynndee Marooney has been writing finance and credit-related articles, guides, manuals and e-books for private companies since 1995. She holds a Bachelor of Arts in journalism and a Bachelor of Science in finance from the University of Maryland. She enjoys counseling clients who are experiencing financial difficulties.

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