What is a Bank Levy?

A bank levy is one of the most powerful collection tools available to creditors and government agencies for recovering unpaid debts. When traditional collection methods fail, a bank levy allows creditors to legally seize funds directly from a debtor’s bank account to satisfy outstanding obligations.  

Let’s take a closer look at everything you need to know about bank levies, from how they work to your rights and options for protection…*

The basics

A bank levy, also known as a bank account levy or bank attachment, is a legal procedure that enables creditors to freeze and seize funds from a debtor’s bank account. Unlike a wage garnishment that takes money from future paychecks, a bank levy is an immediate seizure of available funds in the account at the time the levy is executed.

The process involves a court order or legal authorization that requires the bank to freeze the debtor’s account and turn over the funds to satisfy the debt. Once a levy is placed, the account holder typically cannot access the frozen funds, and the bank must comply with the legal directive to transfer the money to the creditor.

Types of bank levies

Bank levies can be initiated by different types of creditors, each operating under specific legal frameworks:

• Government levies: Government agencies have some of the broadest powers when it comes to bank levies. The Internal Revenue Service (IRS) can levy bank accounts for unpaid federal taxes without obtaining a court judgment first. State tax agencies, child support enforcement offices, and other government entities also possess similar authority. These agencies typically must provide notice before executing the levy, but the requirements are often less stringent than those for private creditors.

• Private creditor levies: Private creditors, including credit card companies, medical providers, and other businesses, must first obtain a court judgment before they can levy a bank account. This process involves filing a lawsuit, serving the debtor with legal papers, and obtaining a judgment from the court. Only after securing this judgment can the creditor proceed with collection activities, including bank levies.

• Student loan levies: Federal student loan servicers have special collection powers that allow them to garnish wages and levy bank accounts without obtaining a court judgment. However, they must provide specific notices and follow federal regulations governing student loan collection

The bank levy process

Understanding how a bank levy unfolds can help debtors recognize the warning signs and take appropriate action:

1. Pre-levy requirements: Before executing a bank levy, creditors must typically satisfy certain legal requirements. For private creditors, this means obtaining a court judgment. Government agencies may have different notice requirements but generally must provide some form of warning before taking action. The debtor usually receives notices of the pending collection action, though the specific timing and format of these notices vary by jurisdiction and creditor type.

2. Execution of the levy: When a bank levy is executed, the creditor or their attorney sends a legal document to the debtor’s bank instructing them to freeze the account. The bank must comply immediately upon receiving this notice. The financial institution then freezes all funds in the account up to the amount of the debt, plus any associated fees and interest.

3. Bank response and holding period: Upon receiving the levy notice, the bank typically freezes the account and sends a notice to the account holder explaining what has occurred. Most jurisdictions require a holding period during which the funds remain frozen but not yet transferred to the creditor. This period, usually ranging from 10 to 30 days depending on local laws, provides the debtor with an opportunity to challenge the levy or claim exemptions.

4. Final transfer: If no successful challenges or exemption claims are made during the holding period, the bank transfers the levied funds to the creditor or the court. The bank may also deduct its own fees for processing the levy before transferring the remaining funds.

Legal rights and protections

Despite the significant impact of bank levies, debtors retain certain rights and protections under federal and state laws:

• Federal exemptions: Federal law provides several important protections for certain types of funds. Social Security benefits, Supplemental Security Income (SSI), Veterans Affairs benefits, and federal employee retirement benefits are generally protected from levy by private creditors. Banks are required to review accounts for these protected funds and may automatically protect up to two months’ worth of federal benefit deposits.

• State exemptions: State laws provide additional protections that vary significantly by jurisdiction. Common state exemptions include protection for a certain amount of wages, retirement account funds, life insurance proceeds, and basic living allowances. Some states also provide head-of-household exemptions for individuals supporting dependents.

• Joint account considerations: When a bank account is jointly owned, the levy typically affects the entire account balance, even if only one account holder owes the debt. However, the non-debtor account holder may have rights to claim their portion of the funds through appropriate legal procedures.

Challenging a bank levy

If you’re facing a bank levy you have several potential avenues for challenging it:

• Exemption claims: The most common method of challenging a bank levy involves claiming that some or all of the funds in the account are exempt from collection. This requires filing appropriate paperwork with the court and providing documentation to support the exemption claim. Examples include proving that funds come from protected government benefits or qualify for state-specific exemptions.

• Procedural challenges: Debtors may challenge the levy on procedural grounds, arguing that the creditor failed to follow proper legal procedures. This might include improper service of legal documents, failure to provide required notices, or attempting to collect on a debt that has exceeded the statute of limitations.

• Payment arrangements: In some cases, debtors can negotiate payment arrangements with creditors to release the levy in exchange for agreeing to a structured payment plan. This approach requires good faith negotiations and the creditor’s willingness to accept alternative payment terms.

Impact on different account types

Bank levies affect various types of accounts differently:

• Checking and savings accounts: Standard checking and savings accounts are generally subject to levy, though exempt funds within these accounts may receive protection. Banks may be required to identify and protect federal benefits that have been directly deposited into these accounts.

• Business accounts: Business bank accounts can be levied for both business debts and personal debts of business owners, depending on the business structure. Sole proprietorships offer little protection, while properly maintained corporate accounts may provide some separation between business and personal obligations.
• Retirement accounts: Most retirement accounts, including 401(k)s and IRAs, receive significant protection from creditors under federal law. However, once funds are withdrawn from these accounts and deposited into regular bank accounts, they may lose their protected status.