If you get behind on your income taxes, student loan payments, or child support, a government agency can garnish a percentage of your wages to pay the debt. What you may not know is that creditors can also remove funds from your bank accounts, which is called a bank levy. Creditors can take money from savings accounts, but generally, the debtor will need a court judgment, though exceptions apply.
The Difference Between Garnishment and Levy
Generally speaking, private creditors will use wage garnishments, while government agencies use levies.
With a wage garnishment, creditors take funds directly from your paycheck. The court has to issue an order to your employer that tells them the amount to deduct from your check and to whom to send it. The amount will be deducted every pay period until your debt has been settled.
There are legal limits to how much of your check can be garnished. For example, a student loan servicer can garnish up to 15% of your check if you default on your student loans.
A bank levy is a bit different, and creditors can remove all funds from your account until the debt is paid. Typically, to levy funds in your account, a creditor has to sue you and receive a judgment in their favor. There are a few exceptions, though. If you are behind on your taxes, the IRS simply needs to send you a letter telling you they plan to levy your account if you do not pay your back taxes in full.
Your creditor will also not need a judgment if your overdue account is at the same bank as your savings account. For example, if your car loan is at the same bank as your savings account, and you fall behind on your car payments, your bank can automatically transfer funds from the savings account to your overdue auto loan balance.
How Bank Levies Work
If a creditor is granted a levy, they can freeze your bank account. You will not be able to withdraw funds, but they can. If deposits are being made to the account, they can keep all of this money until the debt is paid in full. In addition to losing the money in your bank account, you will also be charged a bank levy fee, which will vary by creditor.
If two people share a bank account, know that joint accounts are also eligible for bank levies—even if the debt belongs to only one party. In most states, joint accounts mean both account holders are considered 100% owners, so the funds in the account belong to both parties equally. However, it may be worth contacting an attorney, as in some states, a spouse’s funds can be protected.
Stopping a Bank Levy
Ideally, if you contact your creditor before they are awarded a bank levy, you will be in a better position to create a payment plan. However, if the bank levy has already been filed, you still have some options for ending it.
- Typically, you have 21 days to reverse a bank levy decision. An attorney or tax professional can help you navigate the reversal, and may be able to convince the creditor to return any funds they have already withdrawn.
- If you cannot reverse the levy, you can try to settle the debt to end the levy. A debt relief counselor will be able to help you create a payment plan proposal or settlement offer to present to your creditor.
- You may be able to file a hardship plan, but the process will differ, depending on the creditor. With the IRS, you can follow their process to file an economic hardship appeal. This will not make the debt disappear, as you will still need to work out a payment plan with them, but the bank levy will end. For other creditors, you can declare a hardship by filing bankruptcy. If you file a Chapter 13 bankruptcy, the debt will become part of your repayment plan, which means the creditor cannot file a bank levy.
Certain incomes are also protected against bank levies. For example, funds deposited into your account from Social Security income may be protected, and custodial or trust accounts are also generally considered exempt. If these situations apply to you, it may be time to hire an attorney.
It is important to know that, in most states, you will receive a notice when a bank levy judgment is issued against you. However, in some states, you will not receive such notice, and you may wake to find your savings account drained. It is important to regularly review your credit report and stay on top of your bills so there are no surprises.