Bank Account Levies and Garnishment
When you owe money, lenders can take several approaches to try and collect the money. You might hear threats about garnishing your wages or taking money from your bank account, and you’ll want to take those threats seriously to understand if your money is truly at risk.
When You Stop Paying
Creditors can’t really force you to repay when you’ve defaulted on a loan. Making payments is something only you can do, and we no longer use the debtor’s prisons. However, they do have ways to “motivate” you and collect money indirectly.
Credit damage is the first thing that happens when you stop paying on a loan. The missed payments will show up on your credit reports, and as a result, you’ll end up with lower credit scores. If you try to borrow more money, it will be difficult because lenders will see that you’re already behind on your existing obligations.
Wage garnishment is another approach. Lenders can bring legal action against you to try and collect. If they successfully win a judgment against you, the court will authorize the lender to contact your employer and demand a portion of your pay (generally up to 25%, or 65% for child support obligations—but there are other limitations that can keep the amount lower). Your employer must then divert some of your pay to the creditor, which reduces the total amount you owe.
Wage garnishment causes several problems. Obviously, you get less pay – and that makes everything harder than it already was. In addition, your employer now knows that you’ve got financial troubles that are leading to legal judgments. While many employers are understanding and treat all employees fairly, it’s best to keep your employer out of your personal life.
Bank account garnishment is a third option. Technically, taking money from your financial accounts is called a levy and again it’s only an option after creditors successfully bring legal action against you. An exception is the IRS, which can garnish your bank account without a judgment.
Creditors such as banks and credit card companies don’t often pursue bank levies, but it’s always a possibility. However, federal agencies such as the IRS and the Department of Education are more likely to collect from bank accounts (for unpaid taxes or student loans, for example).
If you’re subject to a bank levy, the creditor will contact your bank and demand the funds. Your bank must review your account to see if any of the money is “off-limits” from the creditor (sometimes your Social Security or Veteran’s benefits are protected). Any unprotected money in the account will be frozen, seized, and sent to the creditor.
Notification and Negotiation
When a creditor wins a judgment against you, review your situation with a local attorney. Don’t get caught by surprise—you need to know if wages will be garnished or bank accounts will be frozen. Creditors don’t always notify you when they take action–you might hear about it from your employer or your bank.
Once you’re notified of garnishment, you might be able to stop or reduce it. Again, speak with a local attorney for legal advice. Federal and state rules limit how much of your pay (or assets in your bank account) can be taken, and you might need to file paperwork to reduce what your creditor thinks it can take.
You can also try to settle things with your creditor—you always have the opportunity to negotiate. Make an offer to your creditor, whether it’s a lump-sum that you can pay right now or a monthly payment plan. Get everything in writing, and (in addition to stopping garnishment) see if you can get negative items removed from your credit reports.