Avoiding Frozen Bank Accounts

Take these steps so that a creditor can't levy your bank account (freeze the funds).

If you have past due debts, your creditors might take steps to collect directly from your bank by freezing your bank accounts—also called a bank account levy. Even if you're able to remove the bank account levy, you will probably still suffer negative consequences. While your bank account funds are frozen:

  • you won't have access to the money, and
  • checks that you wrote before your funds were frozen, will not clear.

There are steps that you can take to avoid having your bank accounts frozen, or to make it easier to have the funds released if they are frozen. (To learn more about how and when creditors can levy your bank accounts, see Frozen Bank Accounts.)

Here are some ways to avoid the freezing of your bank account funds:

Don't Ignore Debt Collectors

If you want to avoid having a creditor levy your bank accounts, you need to pay your debts. If you have a debt that you don't have enough money to pay, set up a payment plan to give yourself more time to pay. Most state and federal taxing authorities will work with you on this, as will many creditors.

While most creditors will need to get a judgment against you before they can have your accounts frozen, there are some that do not. These include government agencies that collect federal and state taxes as well as child support and student loans. (Learn about ways to stop a creditor from collecting a judgment.)

Have Government Assistance Funds Direct Deposited

If an attachment order or garnishment is received by a bank, it must review the account to determine if direct deposits into the accounts include certain government assistance income, such as Social Security and veteran's benefits. Other benefits covered by this rule include:

  • Supplemental Security Income
  • federal railroad retirement, unemployment and sickness
  • Civil Service Retirement System, and
  • Federal Employee Retirement System.

If direct deposits are made, the bank is prohibited from freezing the last two months of the government assistance deposits.

This rule does not apply to funds deposited by check. If you receive the same assistance in the form of a check which you then deposit into the account, the account can be frozen, until you claim and prove your right to have the funds released.

The bottom line: Switch all government assistance payments to direct deposit.

Don't Transfer Your Social Security Funds to Different Accounts

There are special protections for Social Security income, especially if you have the money direct deposited into your account, but even if you do not. Social Security funds retain their protections even after they are received. However, the burden is on you to prove the source of the funds. If you move your Social Security income to different accounts after you receive it or mix it with other money, it might be more difficult to prove that the source of the deposits was Social Security income.

Know Your State's Exemptions and Use Non-Exempt Funds First

Each state's law provide for certain property or income which can't be taken by creditors to satisfy unpaid debts. You should become familiar with the exemptions in your state so that you can protect your property before you have a problem and make sure that you use your non-exempt or unprotected deposits to pay bills before you deplete the deposits that are protected. (To learn more, see Using Exemptions to Protect Property From Judgment Creditors.)

Keep Separate Accounts for Exempt Funds, Don't Commingle Them with Non-Exempt Funds

If you keep a separate account for funds which you know qualify for a specific exemption from attachment, if an attachment occurs, it might be easier and quicker to have the account released to you if you can show that the account only contains funds which qualify for an exemption. If the funds are commingled or mixed with money that is not exempt, you will have to trace the deposits to prove to the court that the balance which was actually frozen came from the exempt funds. This is more complex and will take more time.

For example, if your state protects wages for head of household, it would be a good idea to set up a wage account and have all of the head of household's wages direct deposited into this account. If a creditor obtains an attachment order, you can easily show that the only money in the account came from the head of household's wages and have the funds quickly released.

Don't Keep Your Account in a Bank That You Owe Money To

If you owe money to the bank that holds your savings or checking accounts and you fall behind on your payments, the bank has the right to set off the funds in your account against the debt. As long as you owe the money to the same bank that holds your accounts, it does not need to get a judgment or court order to do this. (To learn more how this works, see Bank Setoffs.)

It's generally a good idea to keep your deposit accounts in a bank that you do not have a lending relationship with. While it is common to maintain your business bank accounts at a bank which provides you with business loans or lines of credit, you do not need to keep your personal accounts there. This way, if the business fails, you are less likely to have your personal funds taken to satisfy personal guarantees you might have given on the business loans.

Talk to a Lawyer

Consider talking with a lawyer in your state to learn about laws that might help protect your money and assets from creditors.

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