What is a bank levy?

How does a bank levy work

“A bank levy allows a creditor to seize money directly from your bank account to cover a debt you owe. This usually happens after the creditor has gone to court, won a judgment and obtained permission to enforce it,” David Gelinas, director of National Legal Center, a company that offers debt resolution legal services across the United States, told us.

A bank levy is one of the most serious collection actions creditors can take.

A bank levy is initiated by a creditor, which could be a federal or state-level agency like the Internal Revenue Service (IRS) or a private company that you owe money. First, the creditor sues you for the debt and wins a judgment against you. Next, the creditor obtains a court order that permits it to enforce the judgment.

Once your bank receives the levy notice, they freeze the funds in your account, usually up to the amount specified in the levy. “During this freeze, you can’t access your money. After the freeze period — often 10 days or less — the bank transfers the frozen funds to the creditor,” Gelinas said.

» MORE: Secured vs. unsecured debt

Legal rights and protections

Your first and most important legal right is to receive notice of the levy since it can have a huge impact on your financial situation. Once you’re notified, Gelinas said, you can file an objection or claim an exemption. According to Gelinas, creditors cannot seize the following types of funds under a bank levy:

• Social Security benefits
• Federal railroad retirement benefits
• Civil Service Retirement System (CSRS) benefits
• Federal Employee Retirement System (FERS) benefits
• Veterans’ benefits
• Unemployment insurance
• Federal Emergency Management Agency (FEMA) disaster aid payments
• Child support or alimony payments

So, if your account includes these types of funds, you may want to file a claim outlining that. However, filing a claim often involves hiring a lawyer, which can be a costly undertaking, according to Ashley Morgan, a bankruptcy attorney in Virginia. As such, it’s important to weigh the costs of hiring legal assistance versus the amount of the bank levy.

Steps to dispute a bank levy

Challenging a levy involves filing paperwork with the court to claim an exemption or dispute the levy outright, according to Gelinas. You need to provide proof, such as bank statements or other documentation, to support your case. However, according to Morgan, there are only a few valid reasons to dispute a levy. “General hardship or lack of funds is not a good enough reason to challenge the process once a levy has been placed on your bank account by a creditor,” she said.

The two most common reasons to challenge a levy, according to Morgan: “Challenges usually are based on state law protection, such as if the funds are a protected class of funds and were frozen, or there is joint ownership of the account and the funds do not actually belong to the garnishee.” Here are the steps you should take to dispute a bank levy:

1. Review the debt: Carefully read over the levy notice to ensure the debt is legitimate, the amount is accurate and that the debt does, in fact, belong to you.
2. Negotiate: If the levy was placed by a private company, reach out to the company to see if you can come to a mutually agreed-upon payment plan. If the levy was placed by the IRS, contact them directly to negotiate the unpaid taxes.
3. Send a dispute letter via certified mail: This letter should clearly state that you’re disputing the validity of the debt and that you would like documents that show the debt does belong to you and has not yet been paid.
4. File a claim: If, once you receive documentation of the debt, you feel you have grounds to dispute it, you’ll file a claim with the court involved in the levy process. While you can choose to represent yourself, most people choose to have legal representation when taking this step, Gelinas said.

What to do when facing a bank levy

A good first step to take before you do anything else, Gelinas said, is to learn what you can about the levy: Review the notice to see which creditor is behind the levy and how much they’re claiming. Call your bank to confirm the amount that’s been frozen and find out if any of your funds might be protected.”

This is also a good time to ask about any fees the bank might assess as a result of the levy. Some banks may charge administrative fees for processing the levy, while others may charge overdraft fees if your account goes negative due to the levy being greater than the amount in your account.

Next, open a new bank account at a completely different institution than the one that’s been levied. “If you find out about a garnishment [or levy], change banks immediately,” Morgan said. “Garnishments are usually for a specific bank. Depending on state law, the creditor may issue multiple garnishments at once. But, if you open an account at a new bank that has no levy order, you could use that account [for daily living expenses and to pay other bills],” Morgan advised.

To summarize, here’s what you should do if a creditor levies your bank account.

1. Review the levy notice.
2. Call your bank to confirm and check on protected funds.
3. Dispute the levy if you feel it isn’t valid or accurate.
4. Attempt to negotiate directly with the creditor if the debt belongs to you.
5. If that doesn’t work, consult a legal professional for potential alternative solutions.
6. Open a bank account at a different bank.

The bottom line

A bank levy is an extreme action that’s typically only taken after multiple attempts by a creditor to collect a debt you owe them. The good news is there are actions you can take to ensure you never have to endure the bank levy process again.

When you stop making credit card payments, avoid paying taxes due to your state or the federal government or ignore large medical bills, a bank levy can force your hand and quickly become a huge inconvenience and financial burden for you.

Instead, always keep open lines of communication with any creditor you owe. Most are more than willing to work out a payment plan that’s amenable to your budget and that even includes the IRS. Taking this simple step can help you pay your debts in a way that’s manageable for you and keep you safe from a future bank levy.