How Does a Creditor Levy a Bank Account?

If you're the defendant in a lawsuit regarding an unpaid debt and your creditor wins the case and a judgment, you may be subject to a bank levy. The creditor must go through a legal process to place a levy on your account, and follow rules and guidelines set down by state law. Although a levy is not the same as wage garnishment, the result of these two actions is the same: money is diverted to a creditor to satisfy a debt.

A bank levy results from a civil court judgment in favor of a creditor, which may be a bank, a credit card issuer, a federal or state agency, or an individual. While a debt case is pending, a creditor may not levy funds or request that a bank freeze your account. In addition, if you file for bankruptcy protection, federal law bars any laws, you may petition the court for relief from an ongoing levy.

The creditor provides a copy of the judgment and a copy of a certified order to the bank, allowing the levy to go forward. Some states require the sheriff's department to issue this order, while others allow creditors to go through the clerk of court. When the bank receives the notice, it immediately freezes the account. This prevents any withdrawals by the account holder, or any use of a debit card for purchases or ATM withdrawals. The account holder receives no advance notice; the law does not set a minimum balance for levied accounts. Nor is there a time limit on the levy, which remains in place until the debt is satisfied or the account holder successfully appeals the levy.

Federal law protects some payments from bank levies. This includes Social Security benefits, federal veterans benefits, and Supplemental Security Income payments. Some states also protect child support, alimony payments, unemployment compensation and welfare benefits. However, to protect these exempted funds, the account holder must identify the source of the funds to the bank. If exempt and non-exempt funds are mingled, the bank has no obligation to identify exempt funds and allow the account holder access to them. The bank will transfer any and all funds in the account up the judgment amount, then sends a notice of the action to the account holder.

In general, all checking and savings accounts are subject to levy. However, retirement accounts qualified under the federal Employee Retirement Income Security Act generally are protected. ERISA accounts are set up by employers, which must make contributions and allow access to the funds after a specified period of service by the employee. Under the law, the beneficiary of an ERISA account cannot lose his right to the assets, nor can those rights be transferred to another party -- including a creditor -- either by the account manager or the beneficiary.