What Is a Bank Levy?
A bank levy is an aggressive debt collection tactic. A court judgment only entitles the winner of a lawsuit to attempt collection of money awards or damages. The bank levy is a means of actually collecting, and requires additional authorization from a court. When a levy is enforced, it is taken first to a bank or other financial institution, who then applies the levy to the account holder in question. The laws limiting the amount of wages that can be garnished do not apply to bank levies, which means an entire account can be wiped out quickly. If the debt or judgment is not fully paid, the levy is ongoing, attaching to any new funds that appear in the account. A bank levy can provide additional hardship on the debtor because checks written against the account will not be honored.
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Identification
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A bank levy is the technical term for the garnishment of a bank account. It is a method of collecting an unpaid debt, including back taxes, that can occur after a judgment has been issued in favor of a creditor. When a bank, credit union, savings and loan association, trust company or other depository institution receives the execution of a bank levy, it is essentially ordered to freeze funds in a particular account or accounts up to the amount of the levy and remit payment to the party enforcing the levy.
Features
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The features of a bank levy depend on the creditor with the claim and whether the levy is enforced under state or federal laws. A private creditor will operate through the state courts, and will likely use a local sheriff to serve the levy on your bank. In these cases, the state laws on bank levies will govern the bank levy process. If the Internal Revenue Service is enforcing a levy for unpaid taxes, the somewhat more severe federal laws apply. In either case, the funds are held in the account for a specified holding period, during which any interest that accrues on the frozen funds is paid to the collector up to the full amount of the debt levied.
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Effects
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The immediate effect of a bank levy is that funds cannot be withdrawn from an account. Any check written against the account that attempts will be denied clearance, as will other electronic requests for funds. Often this can be the first sign you receive that your account has been levied, since notice isn't generally provided beforehand, to prevent emptying of the account. Unlike wage garnishment, where state and federal rules limit the amount that can be taken by a creditor, bank accounts can be levied up to the full amount of the debt, even if it means emptying the account entirely.
Considerations
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Certain types of funds are exempt from garnishment or levy to at least some degree, particularly funds received for child support. Unfortunately, a bank account doesn't segregate these and other funds. When a bank levy is instituted it becomes the responsibility of the account holder, the person whose account is being levied, to demonstrate that funds in the account are exempt from levy. This can be difficult in state actions because they tend to occur quickly. A federal levy has a default 21-calendar-day holding period before funds are disbursed, and claims of exemption can be made during this time.
Warning
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A bank levy is considered continuous until the amount of the debt is collected or the levy is ended. If the account is emptied pursuant to the levy, but the debt is not satisfied, any additional funds deposited in the account will become immediately frozen up to the remaining amount of the levy. This can be important if payroll checks are electronically deposited in a bank account because employment wages and salaries are exempt from levies.
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