Both the IRS and creditors can use a bank levy and wage garnishments as extreme measures to collect outstanding debt. While the laws are different depending on whom you owe, the procedure is similar. The IRS and the Department of Education, though, have more reach than the other creditors.
A bank levy or a bank garnishment takes place when a creditor (someone you owe) files a legal document with the court, so he or she can withdraw funds from your bank account to collect on outstanding debt. Before a levy is issued, your creditor goes to court and receives a judgment for the money owed. You have a period to respond before the bank levy.
A levy usually describes when a creditor freezes your bank account in an attempt to collect money owed, while a garnishment is often when a creditor obtains money directly from your paycheck to satisfy a debt. A bank levy is more severe than a garnishment, since the creditor can take money from your account until you repay the outstanding balance. Federal law, though, limits the amount of money your creditor can take from your paycheck.
Anyone you owe money to can issue a levy on your bank account as a strategy for repayment. The IRS or the Department of Education are more likely to use account levies as a strategy for debt collection. Other creditors can issue levies against you as well, such as lenders or child support recipients.
To levy your bank account, a creditor goes to court to get a judgment against you for the amount you owe. Once the creditor receives a judgment and has tried to collect the money, the creditor is free to issue a levy if you have made no attempts to come to an agreement or a payment arrangement with the creditor.
While most creditors must go to court to levy your account, the IRS and the Department of Education do not. You may be able to avoid levies by making a payment arrangement with your creditors, including the IRS and the Department of Education.
A creditor must prove attempts to collect your outstanding balance before getting a judgment against you. The creditor usually tries to communicate with you via phone or mail. Sometimes, creditors choose to turn your account over to a collection agency or to seek a judgment for the outstanding amount.
Before most creditors can put a levy on your account, they must go to court to get a judgment against you. The creditor must prove you owe him or her money. It is in your favor to show up in court. If you feel that it is not your debt or you dispute the amount, bring your evidence to the court hearing.
If the judge issues the creditor a judgment, that creditor can pursue more aggressive options to collect on the debt. You still can negotiate with your creditor, even though the court ruled in your creditor’s favor. Debt collectors, such as the IRS, have several debt settlement options, including the offer in compromise, where you can settle your debt for less than you owe.
A bank will not let a creditor levy your bank account without a court order. Once the creditor gets a judgment, the creditor can obtain a writ of execution from the court that granted the judgment. The summons will have:
The creditor must let you and the bank know about the judgment. There is a period where you can still negotiate with your lender before the bank account garnishment starts.
A levy can last as long as it takes your creditors to collect the amount you owe them. If your account is emptied, they can come back when you have more money in the account. If you are experiencing financial hardship, levies can make that situation even worse. Your other account transactions can also be affected because:
You still have a chance to stop a levy any time during the levy process. You can stop a levy if:
The IRS process for issuing a bank levy is slightly different from a regular creditor’s. The IRS does not need to get a judgment against you. An IRS levy happens when the IRS seizes your assets to pay for an outstanding tax debt. In the case of a bank levy, the IRS attempts to collect the funds through your bank account. It is one of the easiest ways for the IRS to collect on back taxes.
The IRS will not begin the levy process without letting you know. First, the IRS will send you a “Notice and Demand or Payment,” which is a notice from the IRS requesting payment in full. The amount includes your back taxes, interest, penalties, and any other fees you have accrued. The IRS will give you time to contact it and to formulate a payment arrangement or to make a full payment.
Assuming you neither pay nor contact the IRS, the IRS will give a 30-day levy notice. It is known as “Final Notice of Intent to Levy and Notice of Your Rights to a Hearing.” The IRS will notify you personally, leave a notice at your home or business, or send registered or certified mail to your last known address. You have up to a 30-day period to respond to the IRS. During this period, you can request a hearing, or you can try to resolve the back taxes with the IRS.
Per the IRS’s “Final Notice of Intent to Levy and Notice of Your Rights to Hearing,” you can request what is known as a “Collection Due Process Hearing.” This hearing gives you an opportunity to dispute the amount you owe. There are some reasons you may want a due process hearing:
You have 21 days after a levy notice to resolve your back taxes with the IRS. The IRS is willing to work with you. The levy process can be intimidating. However, it is best that you contact the IRS at once. Assuming doing nothing is off your list, four options can stop the levy:
If you answer within 21 days by either paying your debt in full or catching up with overdue payments, the IRS will stop levy procedures at once. If you remain in good payment status, you do not have to worry about tax levies.
The most common way to stop a levy is to enter into a payment agreement with the IRS. The IRS has several repayment plan agreements, including:
Some of these options may come with other fees.
The IRS has short-term payment plans for taxpayers who need 120 days or less to pay their taxes. You can pay by:
There are no added fees except for extra penalties and interest that accrue until you pay your debt in full.
If you need more than 120 days to pay your back taxes, the IRS has two long-term repayment plans. These plans have an application setup fee. One agreement requires the ability for the IRS to withdraw payment automatically, while the other ones are a little more flexible. The total cost for the plan includes the application fees and the fees from your outstanding balance.
Your financial situation can change while in a payment plan agreement. You can reinstate or restructure a plan. The IRS charges an application fee to do so, but it is far better than wage garnishment or a bank account levy.
If you are experiencing economic hardship, then the IRS must release a levy. Economic hardship is a situation where you cannot meet “basic, reasonable living expenses.” You cannot just declare economic hardship; you must prove it. The IRS will ask for detailed financial information, so make sure you have information about your income, expenses, and other financial data ready.
If you do get a levy release, that does not mean you do not owe the money. You still need to work with the IRS to come up with an acceptable payment plan, or you will find yourself in the same situation a few months down the line.
Bankruptcy is another way to stop a levy — though it may be only a temporary stop. There are guidelines for having the ability to include your back taxes in your bankruptcy. If you cannot add your back taxes in your bankruptcy, then like a levy release, this is a reprieve. However, it gives you time to work out an agreement to pay your back taxes.
An offer in compromise allows the taxpayer to pay back less than what he or she originally owed. It is not easy to qualify for this program, but it is one many tax professionals use to settle their client’s tax debt. You may be eligible for the offer in compromise if:
There are other qualifiers, but you must fall into one the above categories first.
Owing back taxes is not a situation to take lightly. The IRS has far more reach than regular creditors. If you can pay your taxes in a short amount of time, then it is easy to sign up for one of the IRS plans. The more complex your situation, the more likely you will need professional representation. You can get free help or hire a firm or a tax professional to represent you.
If you need help finding a reputable debt or a tax settlement company, let our team help you find the best match. At Solvable, we have done the hard work for you. We use our digital platforms to review the best companies after we have performed an extensive verification. Do not waste your time spending hours searching for a debt settlement company instead of settling with your creditors.