A levy on a bank account can happen when you cannot continue paying bills to creditors, also known as credit or loan default. A levy will freeze your bank account and allow creditors to access your account for their funds. Having a bank levy can be devastating to your finances. Not only will it affect your immediate access to funds, but it can also affect other bills, your credit score, and more.
Below you will find everything you need to know about stopping a levy on your bank account, along with more information on the levy process and what kinds of creditors can levy your bank accounts.
How Does the Levy Process Work Exactly?
A creditor can take legal action when you do not pay your debts. They will need the necessary paperwork to file a court judgment against you for unpaid debt. Once they get the judgment they need, they will send that to your bank or Depository institution. After that, they may gain access to the funds in your bank account.
From here, your bank may immediately freeze your account. This means you won’t be able to take out any money, including transferring any from one account to another or writing checks from the account. Automatic bills will not go through either. The only thing you will be able to do is to deposit money into your account and check on transactions.
Will I Get Any Notice Before Bank Levies Occur?
Unfortunately, banks and credit unions are not required to provide notice to their customers if their accounts are frozen. If this happens to you, you likely won’t find out until you use your debit card to pay for something, try to withdraw funds from an ATM, or transfer money online.
What Kinds of Creditors Can Levy My Bank Account?
Remember that lenders cannot sue you directly; they must go through a credit collection agency or debt collectors. There are different kinds of debt collectors who can freeze your bank account. Here are some examples of lenders where you may face legal action if you owe money:
- Credit card companies.
- Payday loan organizations.
- Personal loan lenders.
- Medical billing companies.
- Private student loan lenders.
In addition to lenders, government creditors/agencies can also levy your bank account. For example, the internal revenue service (IRS) can put a levy on your bank account if you have unpaid taxes. If a property is involved, the IRS can instead pursue a tax levy, giving them rights to a property if the taxes are delinquent. However, you will likely get many repayment options from the federal government before they move to any kind of levy.
Another example of a government agency that can freeze your bank account is your state’s child support agency. This will happen if you have several missed child support payments. Once you are back on track with these payments, the bank levy will be removed.
Steps You Should Take Immediately When Facing a Bank Levy
If you find out your bank is frozen, you should first contact your bank and ask about the details. That way, you will know which creditor is taking that action. From here, there are some things you can do right away to lessen the blow that comes with a frozen bank account:
Consider Opening Another Bank Account Until a Resolution
Opening another checking account until the freeze is resolved with your old one will be a lifesaver. This way, you can safely store any additional money and use it until the bank levy is removed from your primary account.
Immediately Update Your Automatic Payment Options for Bills and Direct Deposit for Income
One of the most important things you can do to preserve your overall financial situation is to make sure you update any automatic bills and direct deposits.
Why is this important? Let’s say you have a levy on your bank account and a credit card payment set up to go through. When your credit card company tries to collect money, they won’t be able to. That missed payment will then appear on your credit report, hurting your credit score. Now imagine the impact on your credit score if you have multiple bills, like that credit card payment, that do not go through.
When it comes to your income, you cannot access any direct deposits made during a bank freeze, so even if you have income, you won’t be able to use it. This levy can mean not having funds for necessary expenses like rent, groceries, etc.
Gather Documents if You Need To Argue the Freeze
If the bank levy is inaccurate, you must gather the correct documentation and information to prove it. Print out statements, identity theft report documents, etc.
Contact the Creditor To See if They Can Do Anything
Another thing that may help is talking to the creditor responsible for the bank levy. They may be open to figuring out a repayment plan for the owed funds rather than working through a levy on your bank account.
How Can I Stop a Bank Account Levy?
Once a bank levy happens, it will be in your best interest to get the levy removed from your bank account. Here are some ways you can get your bank account unfrozen:
Pay off the Money You Owe
If the debt amount is accurate, the most straightforward way to stop a bank account levy is to pay the money you owe. As mentioned above, contacting your creditor may help as you may get some kind of repayment plan. However, if you have to pay the money you owe upfront, you may want to consider a side gig to pay bills, borrowing the funds from friends or family, or selling some of your stuff. You can also consider taking out a loan to pay back your debt.
Check the Statute of Limitations
Check state and local laws to see if the statute of limitations has passed for your specific debt type. Creditors have a certain period they can collect a debt (depending on the obligation), and if that time has passed, you should be able to get the levy released.
If There Is an Error, Prove It
Let’s say there is an error in the amount of money you owe or the total amount in general. In that case, you should be able to prove it. Things like receipts and online statements can help you establish the correct amount. Once you have everything you need, you’ll have to fill out a debt validation letter and send it via certified mail. Creditors make mistakes all the time, and if you have proof that you have paid your debts, the judgment should be removed, freeing up your bank accounts.
File for Bankruptcy
If you genuinely cannot pay any of your debts, then filing for bankruptcy can alleviate the debt you owe and free up your money. Obviously, bankruptcy should be your last resort as it can devastate your credit score and your personal finances. But, it can stop debtors from reaching into your bank account to take money.
Proof Identity Theft if You Are a Victim
If you are a victim of identity theft, and the creditor’s account levy is not because of your actions, the creditor should remove the bank levy with the right proof. To prove identity theft, you will have to file a police report and get an Identity Theft Affidavit which you can get by filing a claim with the Federal Trade Commission (FTC).
Is Wage Garnishment the Same as a Bank Levy?
Wage garnishment is when a creditor directly pulls money from your paycheck. With wage garnishments, creditors can take from many income sources, except government assistance/federal benefits. And so, they cannot take from benefits like supplemental security income, disability income, veteran’s benefits, or other aid forms. Bank levies differ in that private creditors will pull from your bank account. Either way, both of these tactics to collect a debt can definitely hurt your finances and livelihood.
The Bottom Line With Bank Levies
The best thing you can do with your debt is to pay it on time. There will be consequences when you cannot pay back a loan, so it is best to be transparent with your creditor. Most creditors would rather negotiate with their borrowers than take things to court. Having a bank levy can be devastating and really impact your life beyond the financial sphere. And so, if you face a bank levy, act quickly to get your finances back on track.
References:
Frozen Bank Accounts | Consumer Law Center, Inc. | San Jose, CA.
Frozen Bank Account? Here Are the Rules Creditors Must Follow – Tayne Law Group
