What is a Bank Levy and How it Works?
Table of content:
- How does a Bank Levy work?
- How tax levy could affect you?
- How to stop an IRS levy?
- How to dispute a bank account levy?
Let’s start from the top,
You may ask yourself,
- What does it mean to levy a bank account?
- What is a levy on my bank account?
- Who levied my bank account?
- How does a levy on a bank account work?
Please look at this article to know:
- What is a levy on a bank account?
- What does a levy mean on your bank account?
- Does a bank levy freeze your account?
- What happens when the IRS freezes your bank account?
- Why would the IRS freeze your bank account?
- How long does a levy stay on your bank account?
- How to stop an IRS levy on a bank account?
- How to remove a levy from your bank account?
- How much can a bank levy take?
- How many times can the IRS levy your bank account?
When you are behind in your payments, bank levies can be a powerful tool for creditors. This doesn’t mean that you are powerless. It is possible to stop a levy in certain situations, especially if you have no federal benefits.
A Bank levy can be used by creditors to seize funds from the bank account of a debtor to pay off the unpaid debt. The debt could come from an unsecured loan or a medical bill. To collect unpaid taxes, the IRS can use a bank levy.
Creditors will serve documents to the bank or financial institution holding your account to initiate a levy. The bank will then place a freeze or hold on the funds that are subject to the levy. This is typically money that you have in savings or checking accounts. A levy should be challenged in court. If the challenge fails, the bank will send funds to the creditor to settle the debt.
Lenders can take money and time to seize funds from a bank account. The lenders don’t have access to your account balance before they begin the levy process. This is why creditors only resort to a bank levy when they have exhausted all other options to collect unpaid debt.
A Levy is a legal seizure of your property to satisfy a debt. A tax levy is different from a tax lien in that a lien is a security in support of a tax debt, whereas a levy is the actually taking of property used to satisfy a tax debt. If you have a tax debt that is unpaid, and you have not made arrangements to pay that debt, the IRS may seize any of the following;
If the IRS determines that you are available to be levied, a Levy is usually only issued after certain requirements are met by the IRS.
If the IRS decides to levy your wages, your employer will be required to confiscate up to 70% of your wages in order to satisfy your tax debt. The Levy will NOT stop until the tax debt is paid in full.
How does a Bank Levy work?
A bank levy allows creditors to access your bank account funds. Your bank will freeze funds in your account and require the bank to send this money to creditors to pay your debt.
To request funds from your bank account from a creditor, you must send a request to your bank proving that there is a legal judgment against you. Some government creditors like the IRS don’t require a court judgment.
Here are some things you need to know:
- Warning: After your creditor requests it, your bank will immediately freeze your account and examine the situation. It is possible that your bank won’t notify you of a bank levy, and creditors may not inform you. A levy is method creditors use to collect money from you after other options have failed. Typically, creditors will use a levy to collect money from you once they have exhausted all other options.
- Dispute options You should be able to contest a levy. You can stop creditors from taking money out of your account or reduce it. Lenders can take your account and make it difficult to pay for essential expenses if you don’t act. You could end up paying late fees to other organizations and bouncing your checks. Your bank may charge you fees to process the levy.
Your bank can provide contact information to the creditor if you aren’t sure who is levied on your account.
A creditor is looking for ways to collect past-due debts and the levy process begins. It is usually followed by less formal collection attempts like collections calls. To levy an account, most lenders need to obtain court approval. The creditor will file a lawsuit against your account to get court approval. If the creditor is successful, the court will issue a judgment stating how much you owe. This is known as a money judgment. This is your best and most important opportunity to dispute the amount owed.
A money judgment allows the lender to collect in a variety of ways, including levying your accounts. The state law will dictate how the lender can collect money from your account. It will also determine if there are limits on how much they can take and exempt funds. Creditors must have all the legal documentation required to levy an account. This includes the money judgment as well as any other required state law documents. For example, some states require a separate writ for execution (like a court or judge) that identifies the accounts to be levied.
The bank will immediately freeze the account if the creditor gives the bank the levy documents. All withdrawals will be stopped by this. The lender will only allow you to withdraw funds if you have more money than you owe. The freeze will remain in effect for approximately 21 days. The levy may be in progress. You may not be notified. The levy may be too severe for you, so banks might charge you fees to process it.
Bank levies can remain on an account until the debt has been paid or the levy lifted. A levy may be used multiple times on the same account. Creditors can retry the debt as many times as necessary if they don’t have sufficient funds on their first attempt.
You must pay off the entire debt or prove that funds in the account are exempted from the levy to remove or lift the levies. Like Wage Garnishment Exemptions, some types of income from bank accounts could be exempted or excluded from the levy.
Agencies that don’t need court approval to levy funds
Some government agencies like the Internal Revenue Service and the Department of Education don’t require a court judgment to levy an account. If the federal government is collecting student loans, this is also true. However, they must give you ample notice. For example, the IRS will mail you a final notice informing you that it intends to levy a tax within 30 days of serving a tax levied on a bank.
Other ways Judgment Creditors can try to collect on a debt
A judgment creditor may also levy your bank account to collect a debt. The advantage of the levy is that the lender has access to large amounts of cash. However, they do have other options. Each state has its own rules about what it can and cannot take, as well as the ways that you can protect yourself. Some examples include:
Creditors may levy a percentage of an employee’s wage. This is known as wage garnishment. Before garnishing your wages, lenders will need to obtain the appropriate legal documents from a court. An employer might have to give back a portion of your wages if they do. They can’t take it all. The maximum amount that can be garnished is determined by federal and state laws. It is often set at 25%. It may vary depending on the type of debt and the applicable state law.
Mortgage lending can also forbid the sale of real estate. They can put a lien on your house and force you to sell it (called foreclosure sales) or pay you when you sell it. The proceeds of the sale are used to “lift” the lien. To force a sale, the mortgage lender must jump through many hoops. You may be able to protect your home from foreclosure.
A writ can be obtained from a court to seize personal properties. A writ allows a sheriff, or another public official, to enter your home or business to seize assets (such as cash registers, boats, jewelry, etc.). In certain circumstances, they can take your vehicle. The proceeds can be applied to the debt by selling the property at a public auction. This is called a “writ to enter”. However, not all property can be taken. It can help to understand what types of personal property are exempt from a judgment and which personal property can be taken.
When collecting on unpaid debt, lenders have many options. Many factors are involved. Lenders have many options when it comes to collecting on unpaid debt. This includes seizing and selling personal property and foreclosing the real property. These situations may lead to debt collectors offering to negotiate a repayment plan with you or writing off the debt as uncollectible. There may be other options, such as defenses against collection efforts.
You can limit or prevent levies from being applied to your account. Talk to a professional tax attorney same as Ideal Tax to learn about your options (laws differ from one state to the next). There are several options:
- Creditor error You can challenge the levy to stop the creditor from moving forward. If you have already paid the debt or the amount is incorrect, this approach might work.
- An old debt: Your creditor may not be able to collect from your account if the statute of limitations has expired. However, it could depend on where you live, and the law of the specific state mentioned in the credit agreement.
- No notification If you were not properly served by your creditor, it may be possible for you to stop any future legal proceedings against them.
- Bankruptcy – Filing bankruptcy could temporarily halt the process.
- Negotiation – A settlement reached with creditors could stop the process. You might try to negotiate with your creditors so that you have some control over the situation. If the Internal Revenue Service (IRS), for example, determines that the process is causing an “immediate economic hardship,” it may be able to exempt you from the levy.
How tax levy could affect you?These are some possible outcomes if you get hit with an IRS levy.
- Your paycheck could shrink. Wage garnishment can be a common tactic. This means that your employer will pay a percentage of your earnings each payday.
- Bank accounts may be frozen. For recouping taxes, bank accounts are a prime target. The IRS typically contacts your bank to place a 21-day hold on your account. The bank might send part or all of your money to IRS if you don’t reach an agreement with them.
- Your house may be at risk. The IRS states that it cannot seize unemployment benefits and certain annuity and pension benefits, certain disabilities payments, workers’ compensation, public assistance payments, or child support payments. Undeliverable mail, certain items needed for school or work, as well as certain furniture and household goods, are all out of reach.
How to stop an IRS levy?There are many ways that you can stop the IRS from taking your assets. You need to find a solution that suits your financial situation. These are the most common arrangements that the IRS will accept. In almost all cases, you will need to file all tax returns.
- Pay your tax bill
This is the best way to stop a tax levied if you have the funds to do so. Some taxpayers borrow money from family or friends to make the full payment. You may be able to find a loan at a lower interest than what the IRS charges for penalties or interest. This will allow you to pay your taxes fully.
- Installment Agreement
An installment agreement allows you to make monthly payments that will pay your taxes over time. You must complete the installments within 84 months or less. The interest will continue to accrue but the IRS will reduce the penalty for failure to pay 50% if you make timely payments. Taxpayers must request that the tax levy cease once an installment agreement has been reached.
- Partial Payment Installment Agreement
Like regular installment agreements, you only pay what you can afford monthly. The IRS will assess your financial situation to determine how much you can afford monthly. Most cases will see the end of the collection.
- Offer in Compromise
The IRS will allow you to pay less tax than you owe, and you can then pay it off. You must meet stringent financial requirements to be eligible. You must prove that you are unable to pay the taxes using any other method. The IRS will usually accept a compromise offer if there is no alternative way to obtain more money.
- Innocent Spouse Relief
This type of tax settlement is rare. You are usually jointly liable for tax if you file a tax return with your spouse. If you can show that you are innocent and not responsible for the tax, you might be eligible for relief. There are several qualifications that you must meet.
- CNC Status: Currently Not Collectible
If the IRS requires you to pay it, this is when you can prove that you are in financial hardship. The IRS will allow you to cover basic monthly living expenses. If you are unable to pay the IRS or meet basic living standards the IRS may place you in a CNC status. Most cases will end collection activities once you are in this status. But interest and penalties will continue to accrue.
- Prove tax identity theft
This happens when someone takes your identity and requests a refund by using incorrect deductions or credits. In certain situations, the employer may not withhold taxes, but someone could steal your identity to get 1099 income and W2 wages. You should request proof of identity theft if this is the case.It is also good to find the source of funds. It is possible that creditors might not have access to the money depending on how it was obtained. Your bank will determine if your account balance includes protected funds. If you have deposits from multiple sources, it can make things more complicated. This special treatment is available to:
- Federal benefits: Benefits such as Social Security payments and federal employee pensions are usually protected. You don’t get the same protection if your federal government owes money as if it owed money to a private creditor.
- Child Support: Money received from child support payments could also be exempted from the collection. If you are behind on child support payments, it might be easier for your ex to tap your bank accounts.
How to dispute a bank account levy?You might be able to save some or all your bank accounts from being taken over by knowing what you should do. These funds may be necessary for your daily living expenses such as food and shelter. You should be able to contest the levy if the lender follows the correct procedure. A writ is a court order that a creditor must obtain. It usually comes with the requirement of giving notice. You will need to act within a few days, usually ten days after receiving the notice. This will allow you to raise any defenses or exemptions. A few states also protect consumer accounts by mandating that both the bank and the judgment creditor take certain steps before the account is frozen or levied. Even if you do not receive notice, it isn’t always necessary. You can learn about the levies by trying to withdraw funds since your funds will be kept frozen for several weeks. Your funds could be frozen for other reasons than a levy. If they suspect suspicious activity, your bank could freeze your account. Your bank should inform you if your funds have been frozen. The bank should be able to explain the problem. You’ll need to quickly defend against levy if it is.
How To Defend Against a Bank Levy?
You should look at all options to defend against a levy being placed on your account. A valid defense will help you protect the money in your bank account.
- Check for errors in judgment.
- Make sure you know if you owe money and the amount being levied. You should also look for other errors, such as levies on accounts not listed in the writ. Everybody makes mistakes. If you can prove that you are the victim of identity theft, the debt will not be valid. Credit card debt is often a case in point.
- An object for failure to give notice.
- It may be possible, if you fail to provide the necessary notices, to lift the levies. Although the creditor might be able to give you notice again, this will give you more time for other defenses. Remember that not all lenders will give notice to you.
- Review the statute of limitations.
- Lenders must collect on a judgment within a specified period, usually 4-10 years. They are out of luck if they don’t. It will depend on the applicable state law, credit agreement, and type of debt (credit cards, car loans, tax levy, etc.). Other factors.
- File for bankruptcy.
- Filing for bankruptcy puts a halt to collection efforts. Although it may only be temporary, this allows the court to intervene and determine what assets can be used to pay off debts. This may be used to discharge the debt that is the source of the levy.
- Talk to the creditor.
- Negotiate with the lender to reduce the levy. They want to avoid expensive and time-consuming collection efforts. For example, they may be open to a repayment plan.
- Make a case for financial hardship.
- IRS levies will allow you to make any defenses. You should check for mistakes because they can make them. Make other arrangements to pay the back taxes if you are able. If the IRS determines that the process is causing serious financial hardship, it may release the levy.
You can open another account. An account that is subject to a levied tax is not necessary to be used. The lender may not lift or refuse to refile the levy if you don’t use the account. It can help you limit your losses while you make your decision. If exempt funds are directly deposited into your bank account, this can help to protect them.
Get Legal Help
It is important to seek advice from an attorney in your area if you are facing legal problems. Many laws vary from one state to the next, and they change all the time. Each situation is different. Appealing a levy is a complex process and you might need to present your case. Creditors will try to convince you that the funds in your account do not qualify for the exemption.
Ideal Tax can assist you if you need to deal with a tax levied related to filing a business tax return. Ideal Tax can help with a variety of tax and small business issues to find a solution, whether you require an offer in compromise or an installment agreement, please contact us for a free consultation (888) 224-3004