If you owe quite a bit of money to creditors and are thinking of either debt settlement or bankruptcy, you may want to think of a safe place to put those funds so a creditor can’t collect on a judgment by levying your bank account.
Did you know that the creditor can garnish the debtor’s bank account without notice in most states? Creditors can take all the money from your bank account through garnishment. And they can take up to the amount of the judgment.
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How can creditors access your money?
Creditors can sue debtors for monies owed. Different types of creditors can legally access your money in different ways. It depends on several factors, including who the creditor is and why you owe money.
Creditors can levy brick-and-mortar, internet banks, fund wallets such as Cash App, etc. The creditors use services that search national banking records and your banking history to track down your accounts.
And these creditors can repeatedly levy your bank account for the life of the judgment, especially if they aren’t exempted funds. It typically takes about 1-2 weeks for the bank garnishment process.
Creditors can reclaim money owed using
- Bank levies: The money is taken from your bank account
- Wage garnishment: The money is taken from your pay
- Tax refunds reclamation: The money is taken from your tax refund
Four ways to open bank accounts that are protected from creditors
Open an account just for government benefits
You can only do this if you’re receiving funds exempt from garnishment. By law, creditors can’t access exempt funds within a specific timeframe, usually about two months.
Examples of exempt benefits include:
- Social Security
- Child support
- Spousal support
- Life insurance
- Veterans assistance
- Life insurance
For any of these funds to be considered exempt, they must directly deposit into a bank account. They are no longer exempt if you withdraw them, move them to a different bank account, or deposit the money yourself.
To avoid confusion or miscommunication, open a new bank account only to hold exempt funds directly deposited into the account.
Open an account in a state with 100% wage garnishment protection
In a bank levy, creditors can request that your bank account be frozen unless it contains exempt funds. If your wages are garnished, the creditor takes a portion of your salary until the debt is repaid.
Supportive state laws mean that a portion of your money can be protected even if it isn’t classified as exempt. But states have different bank levy laws. Some are more favorable to consumers than others.
These states include:
- New York
- South Carolina
- North Dakota
- New Hampshire
Some states don’t offer additional protection from bank levies unless the fund sources are all legally exempt. These include:
Most states protect 75% of your income from wage garnishment, so a creditor can only take 25% of what you earn. Some states, though, protect 100% of your paycheck from garnishment. These include:
- North Carolina
- South Carolina
Check the laws in your state, and if they aren’t favorable, look for an account in a state with benign laws. Don’t use your existing bank or a branch of a bank you currently use.
A bank that creditors can’t garnish must have all its branches in the state where it is protected, or the creditor can still serve the bank in a state where it is not protected.
Open an LLC account
If you have a business or plan to start a business, a Limited Liability Company (LLC) account is legally considered a separate financial entity from the owner. The independent entity prevents business assets from being frozen due to personal debts.
The creditor cannot directly garnish the bank account of the owner’s LLC. Still, he can obtain a charging lien against the LLC, prohibiting the LLC from distributing money from the LLC account to a debtor member.
You will have to be extremely careful to keep business and personal funds separate, or creditors may be able to ask courts to seize your LLC bank accounts.
You must, however, be careful to keep your funds and business funds separate, meaning avoid commingling funds because this could deny you the limited liability protection of the LLC. When this happens, creditors may be able to ask the court to seize your business bank account funds.
If you are opening a business, consider opening a limited liability company, no matter how small the business is. It is relatively inexpensive; fees range from $40 to $500. Once the LLC is set up, ask your bank about the requirements to open an LLC business bank account.
Want to know more about creditors and their access to your business’ funds? Check out this video:
Open an offshore bank account
Offshore accounts are by far the most complicated. If you open an offshore account in your name, creditors can still access the funds through a court order. You would need to open an offshore trust and an LLC, which will own the offshore LLC bank account.
Opening an offshore account will require an attorney and can be costly. Opening this type of account will only be cost-effective if you want to protect a lot of money or diversify assets. It also could be considered fraud if there is already a judgment against you and you move money offshore to avoid paying creditors.
This type of account is technically not exempt. It makes it difficult for a creditor to access this type of account. The court must have jurisdiction to issue garnishment of the offshore bank.
How can creditors garnish your bank account?
Through your employer
Creditors or debt collectors can go after your wages through your employer, who is legally obligated to withhold money from your paycheck if a court orders it.
Garnishing your wages through an employer requires the creditor to file a court request for wage garnishment, and a judge will rule.
Make sure to appear in court if you get a court order, or the decision likely will go automatically against you.
If you lose your job, wage garnishment is no longer possible.
Through your bank
A creditor can target money in your bank accounts using bank levies or bank account levies.
The bank will have two days to review any court ruling. During this time, it will identify your accounts and the reason for garnishment. The bank will check your account history for the previous two months to see if the garnishment isn’t for federal taxes or child support.
When the review is complete, the bank has three days to notify you of the results and to inform you of any garnishment. The garnishment remains in effect until the debt is paid. Or until you’ve reached another form of resolution with the creditor and court.
Other ways to protect your money from garnishment
- Check your state’s laws and exemptions: Laws vary, and some are more relaxed due to the COVID-10 pandemic. Also, review your state’s statute of limitations on the type of debt you owe and verify that the debt remains valid.
- Settle with the creditor: Negotiate a lump-sum settlement or payment plan. It’s always better to work with the creditor so you don’t end up in court. You can also hire a lawyer or a professional debt settlement company.
- Talk to a credit counselor: They can offer guidance and set up a Debt Management Plan.
- File a legal objection to the garnishment: You can do this if it is causing undue financial hardship. Have documentation of your current income and expenses prepared since you’ll need to contact the court that issued the judgment.
- File bankruptcy: This big step can decimate your credit for seven to 10 years, so be sure you understand how defaults work. Filing bankruptcy issues an automatic stay order, which immediately stops wage garnishment until either your debts are discharged, you set up a payment plan, or your bankruptcy filing is dismissed. The automatic stay will depend on the type of bankruptcy filed. Also, not all debts will be discharged in bankruptcy. Many student loans, for example, will remain. Many bankruptcy attorneys offer a free initial consultation, so please consult a lawyer before deciding to file.
Even if the creditor can garnish your bank account without notice, he must file a lawsuit first and obtain a judgment before taking any money from your account.
READ MORE: Pros and cons of filing for bankruptcy
The bottom line
Having creditors running after you isn’t fun. Having even more financial pressure on your shoulders from an adjudicated bank levy is crushing.
Despite some states having better protections against others for bank account garnishment, it may be beneficial for you to learn more about asset protection techniques by speaking with a qualified attorney.
If you want to stop being contacted by debt collectors, there is no magic 11-word phrase. It’s a myth that if you tell the debt collector to “please cease and desist all calls and contact with me immediately,” it will make them stop.
Know your rights. Some of them will attempt to call your place of work. Tell them they are not allowed to reach your place of work and that you are not allowed to receive calls at your place of work. Tell them they cannot contact you at your home address and phone number.
To stop a debt collector altogether from contacting you, you will need to send a certified return receipt letter to the collection company to stop corresponding with you. Make sure you keep a copy. From this point on, they have to stop reaching out to you. They can only contact you if they plan to file a lawsuit against you. If you have an attorney, notify the debt collectors to direct all correspondence to your legal counsel.
The debt validation letter is a letter the debt collector sends you to prove you owe them money. It shows the debt details, like what you owe, to whom, and when to pay. It is different from a 609 dispute letter.
Under the Fair Debt Collection Practices Act (FDCPA), debt collectors must send a debt validation letter to inform you that you are within your rights to dispute the debt. When the debt collectors reach out to you to collect money, they are supposed to let you know the creditor’s name and the amount of money owed and inform you that you can request the information from the original creditor.
No, you cannot go to jail for nonpayment of a debt per se. But there are some exceptions like violating a court order, not paying income taxes, failing to pay child support, or if you don’t appear for a debtor’s examination, which is a particular proceeding under oath about your finances, where creditors look to collect from you via wage garnishment or bank levy.