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If a creditor has obtained judgment against you, they may try to seize money from your bank account or wages to pay an overdue debt. This is known as bank account garnishment, wage garnishment, or a levy.
In most cases, this requires a court order to proceed, but the federal government can issue a levy without the involvement of a court. Fortunately, there are many specific laws at the federal and state levels that apply to levies and may protect your funds.
In the event that a bank receives a notice of a levy, they are required to immediately freeze the debtor’s account. When this occurs, you’re unable to withdraw money, and if you don’t have enough available funds left over, any outstanding payments or checks won’t clear.
This automatic freeze is done to protect the creditor’s funds since advanced notice would give the debtor a chance to withdraw all funds from their account.
Though bank account levies are determined by the court, federal law protects certain kinds of funds from going to creditors. These funds include:
These funds are always exempt from garnishment.
If you’re trying to protect federal benefits from a possible bank levy, it’s best to set them up for direct deposit into a separate bank account. Bank accounts with direct deposit benefits can’t be frozen automatically, as a traditional bank account can, which gives you advance notice of the levy.
If you still prefer to have physical checks for your benefits, then you have the possibility of having your benefits frozen. When this happens, you may need to prove your funds are exempt before they’ll be released to you.
Though these funds are exempt from a bank account levy, there are certain circumstances that will allow them to be frozen. If you owe a certain debt, or you have a surplus of funds in your account, it’s possible that your account may still be frozen.
The “Two-Month Rule” is also an exception. In this case, a creditor may be able to seize your account if you have more than two months’ worth of benefits deposited. If this occurs, you’re able to keep your two months of benefits, but the creditor may be able to seize the remainder.
Your account may also be frozen if you owe certain types of debts, known as “priority” debts, such as:
Unlike federal exemptions, the state exemptions for bank account garnishment vary by state. This can include the types of funds that are exempt from garnishment, the amount of funds that can be claimed as exempt, and whether the account can be seized at all.
That said, there are some exemptions that are common in most states.
If you receive benefits from the state that are deposited into an account that is levied, you may be entitled to exempt funds in your account up to the amount of the benefits. State benefits that fall under this provision include:
Other benefits that may be exempt from garnishment include:
Most states allow general exemptions, which can be distributed to any of your property, such as bank accounts, up to a certain amount. Sometimes known as “wild card” exemptions, these can range from $500 to $10,000 and are separate from other exemptions. In some cases, this may protect your entire bank account from garnishment.
Additionally, if you have a joint account, it may provide protection or limit your exemptions if the other person doesn’t owe the creditor.
The exceptions to state exemptions are similar to federal exemptions in that certain financial obligations, such as tax debt, child support, or alimony, may not be exempt. You can also be denied an exemption claim if you are unable to verify that the source of the funds you deposited in the account were from an exemption.
Like a bank account garnishment, wage garnishment takes place in the court and requires the employer to honor the judgment. After the wages subject to garnishment are determined for each pay period, the employer must withhold the funds until the judgment is satisfied, or the court stops the garnishment.
It’s possible to receive another garnishment after the initial garnishment has been satisfied, but it follows the same procedure. However, the first garnishment must be paid in full before the next can take effect.
If a judgment is garnishing your wages, federal law only allows up to 25% of your net income, or the amount by which your income is more than 30 times the federal minimum wage, whichever is less. This is determined by subtracting the deductions from your paycheck, such as federal and state taxes, Social Security, and retirement deductions. This doesn’t include voluntary deductions, such as charitable donations or savings.
In the case of student loan debt, up to 15% of your net income can be garnished for defaulted student loans. These agencies also need to provide you with a notice of garnishment in advance.
For child support and alimony, up to 50% of your net income may be garnished to pay child support if you’re presently supporting a child or spouse who isn’t the subject of the order. If you aren’t currently supporting a spouse or child, up to 60% of your net income may be garnished. Another 5% can be seized if you’re 12 weeks or more in arrears.
A bank account levy or wage garnishment can be stressful, but Solvable can help. Our goal is to help you understand your debt and provide support for a debt-free life, so contact us today to see what we can do for you!