What is a bank levy?

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During times of financial hardship, it’s not uncommon to fall behind on regular bills and debts you owe. But if you don’t keep up with your payments for long enough, you may experience a bank levy, which is when any funds you have in the bank become “frozen” and unavailable to you.

How a bank levy works

While a bank levy sounds drastic, and it is, creditors have to jump through quite a few hoops to legally freeze your assets. For starters, the company or person you owe money to has to sue you in court and actually win their case. Once the money judgment has been granted, the creditor then becomes a judgment creditor, who can place a bank levy on your accounts.

A bank levy is typically seen as a last resort when other attempts to collect from you have failed. Note that not all accounts are able to be subjected to a bank levy. For example, federal law exempts Social Security benefits and Supplemental Security Income (SSI) from being levied, as well as veterans benefits, student loan disbursements and Federal Emergency Management Agenct (FEMA) Aid. Levies also cannot be placed on federal, civil service or railroad retirement benefits.

Note that, with IRS levies, you may be able to have your bank levy released if you can prove that the loss of funds is causing “an immediate economic hardship.” However, the potential release of an IRS bank levy does not mean that your debt disappears. It only means that your accounts will be unfrozen and that you have to make arrangements with the IRS in order to begin repayment of taxes you owe. To learn more about IRS Bank levies and how to request a hardship release, you can read over IRS Publication 594.

What to do if you have a bank levy

If you owe a creditor a substantial amount of money and they put in the effort to have a bank levy put in place, they have the right to withdraw money from your account until the debt is repaid. Outside of attempting to have an IRS bank levy released, you don’t have many options. For your bank levy to go away, you’ll typically need to repay the debt you owe, work out a settlement on the debt or make payment arrangements that satisfy the creditor.

Regardless of the type of debt, the bank usually has to wait 21 days after a levy is received before surrendering your money. During this gap, you may want to contact an attorney, and preferably one who will give you a free consultation on your options, including bankruptcy. You can usually find free or low-cost help by contacting your local bar association or the folks at Legal Aid.

Note that some debts are so old they are beyond their statute of limitations, although that doesn’t stop debt collectors from pursuing them. Different states have their own statute of limitations procedures on different types of debt, so you should take steps to find out your state’s rules regarding the type of debt you have. If a debt causing a bank levy is old enough that it should not be pursued, you may be able to get a lawyer involved and halt the process.

Filing for bankruptcy is another option if you have a bank levy in place and you cannot seem to get a handle on your finances. Speak with a bankruptcy lawyer who can talk with you about your current situation and the options that may be available to you, including Chapter 7 bankruptcy or Chapter 13 bankruptcy.

How to avoid and stop a bank levy

When it comes to enduring a bank levy, you’re a lot better off if you can avoid this situation altogether. At the very least, a few moves can help you stop a bank levy and get back on track in a short amount of time. If you’re worried about a bank levy and other collections activities, consider these tips:

  • Prove that the creditor made an error. Creditors make errors just like anyone else, and it’s possible that a bank levy has been wrongfully placed on your account. If the debt isn’t yours, the amount is wrong or the debt resulted from identity theft, you can dispute the bank levy with the courts.
  • Negotiate with the creditor. Try to negotiate with the creditor, suggesting either a repayment plan or a settlement offer for less than what you owe. It’s possible that the creditor will work with you personally, but you’ll never know unless you try.
  • Check if the debt is beyond the statute of limitations. If the debt is so old that it’s beyond the statute of limitations in your state, you can dispute the bank levy and have it removed.
  • File for bankruptcy. Filing for bankruptcy can be a smart option if you’re entirely overwhelmed with your finances and you can’t seem to get back on your feet. A bankruptcy attorney can help you figure out what your options are.
  • Stop using your bank account. If a bank levy is in place and the creditor is able to keep withdrawing money, then you may want to stop adding money to the account until the situation is resolved. This won’t stop the bank levy per se, but it will limit the amount of money creditors can collect from you while you figure out your next steps.

The bottom line

Dealing with a bank levy to deal is never fun, and there’s not a lot you can do to make a rightful bank levy go away. Your best bet is figuring out a way to repay your creditor, whether that means trying to settle your debt for a lump sum that is less than what you owe or setting up a repayment plan they will agree with and following through.

A bank levy is a heavy burden to bear, but you shouldn’t ignore yours. You’ll need to take some steps to remedy the situation, even if you ultimately have to file bankruptcy to get a fresh start.

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