Worried about a creditor potentially targeting your bank account? As stressful as the thought may be, there are steps you can take. The most important thing is that you do your best to be informed and fully aware of your situation.
The faster you can move to protect your finances, the better.
In the event that a creditor or debt collector successfully sues you, they may garnish your wages or bank account – even from a savings account. If you want to understand more about how this works, and how to shield your finances from garnishment, you’re in the right place.
Before we go into detail about how to open a bank account that no creditor can touch, let’s touch on some fundamentals.
Can creditors gain access to my bank account?
Creditors are individuals or institutions who are owed money. Debtors are those who owe the money, usually in return for a loan or credit.
Creditors who have payments in arrears may take legal action against debtors for money owed. Depending on the type of creditor, they can be granted legal access to your money, in different ways. How much you owe is also another factor that will influence if and how a creditor can touch your money.
Generally speaking, creditors look to reclaim debts owed from personal funds through three methods:
- Bank levy
- Wage garnishment
- Tax refunds reclamation
What is a bank levy?
A bank levy is a court-ordered freeze on a bank account. If a creditor successfully sues a debtor, they may be able to issue a freeze on a debtor’s bank account until the funds are paid.
However, it’s important to know that bank levies are generally seen as a last resort for creditors, and nobody will end up with a bank levy by surprise.
Keep in mind that bank levy laws vary between states, so it helps to be informed about different bank levy laws depending on where you reside.
What is wage garnishment?
Wage garnishment, or bank account garnishment, is a more common form of debt collection that creditors may instigate after taking a debtor to court. This involves creditors requesting permission from your bank to take a percentage of your income until the sought after debt is fully repaid.
Certain kinds of bank accounts are resistant to garnishment, and can help you protect your personal finances from a creditor if necessary.
It can also depend on the state you’re in. Read on to find out how to set up an exempt bank account safe from garnishment.
Many sources of government benefits are considered exempt from garnishment by creditors. If you’re receiving exempt benefits, such as Social Security payments, you can use a bank account solely for the purpose of receiving and holding your benefit funds. This will ensure that bank accounts will always be protected against garnishment.
Keep in mind that your benefits must be made by direct deposit to be safe from creditors. This is because direct deposit allows creditors to easily trace the funds in your account to an exempt source.
If you deposit your benefits via a check, the funds sadly won’t be protected against the possibility of garnishment.
It is also important to note that your benefits will only be protected for up to a two-month period. That means that any number of benefits over two months’ worth won’t be protected.
Depending on your financial situation, it may make sense to open a bank account dedicated exclusively to handling your government benefits.
Here are some examples of government benefits that are exempt from bank account garnishment:
- Social Security benefits
- Unemployment benefits
- Retirement benefits
- Child support / spousal payments
- Veterans’ benefits
- Life Insurance benefits
- Disability benefit
In certain states, a joint bank account can be exempt from wage garnishment. For example, some states have common law or separate property laws that prevent creditors from garnishing a joint account. Unless the debt in question was taken jointly, your joint bank account could be protected.
In some cases, spouses may have to prove that they have separate finances and are not responsible for each other’s debt.
However, in states that protect against garnishment of joint bank accounts, when it comes to joint accounts in these states, a creditor may still be able to access some of the funds.
It can also depend on whether both parties owning the joint account have benefited from the loan. For example, if a debt was incurred to mortgage a shared property, it could be harder to benefit from any protecting laws.
Be sure to check out the property laws pertaining to the state in which you reside, if you’re worried about a creditor potentially seeking access to any of your accounts.
Be aware that private debt collectors will have to seek a court order to access your bank account. That means you’ll always be well informed ahead of time if debt collectors want to take from your checking account.
This applies to attempts to secure outstanding debts on credit cards, auto loans, mortgages, personal loans, and any other debts.
If you own a business, an LLC bank account could offer you some protection from a creditor seeking to reclaim debts owed.
Many small business owners and solo entrepreneurs may not have a dedicated business bank account. But mixing your personal and business finances can lead to problems in the event that a debt collector obtains legal access to your finances.
In this scenario, the big advantage of having an LLC account is that your personal finances will be legally distinct from your business finances.
This means that if a creditor comes after you for the settlement of personal debt, you can still protect the financial health of your business.
Remember that you must keep personal and business funds separate, meaning avoid commingling funds as doing so could deny you the relevant protections. If your funds are not clearly separate, creditors may be able to seek a court order to seize your business bank account funds in lieu of personal debts.
What about an offshore bank account?
Opening an offshore bank account is often touted as an option when it comes to avoiding debt collectors. However, it is important to note that unlike the options above, an offshore account isn’t legally exempt from garnishment by creditors. It simply makes it more difficult for a debt collector to gain access to the account.
The key here is that while offshore accounts are not illegal in themselves, using one to hide money is.
The only ‘good’ way to protect funds against garnishment in an offshore bank account is to open an offshore trust and LLC account. But in reality, doing so is extremely costly and not a viable option for your average debtor.
Even if some of your funds can be legally exempt, you may still need to take certain steps to ensure they are protected. Exemption from garnishment isn’t always straightforward, and it can get sticky if you’ve got exempt and non-exempt funds blended in a single account.
Here are some basic steps to keep in mind no matter your situation:
As we’ve seen with government benefits, your funds won’t be exempt if they are not received via direct deposit. If you’re worried about creditors potentially seeking access to your funds, a best practice involves setting up direct deposit for any incoming payments.
To protect your bank account from creditors, consider maintaining separate bank accounts to keep exempt funds from mingling with non-exempt funds. Having a different account is also useful if your benefits are funneled in via direct deposit, as mentioned above.
Just keep in mind that while there is no limit to how many bank accounts you can open, there may be a limit on how many you can feasibly manage.
Nobody wants the stress of trying to avoid creditors and figuring out how to protect your bank accounts. No matter how bad your situation seems, you may still have some options to explore.
Here are some further tips that could be useful:
If you’re struggling with debt, negotiating a debt settlement plan can be an effective way to regain financial control. This involves working with creditors to reach a mutually agreeable resolution, often involving paying a reduced amount in a lump sum or through an affordable payment plan.
By reducing your outstanding debts, you can alleviate stress and work towards financial stability. Seek guidance from a trustworthy debt settlement company or financial advisor to ensure you understand the terms of the agreement and it aligns with your financial objectives.
While many federal benefits are protected from garnishment, there are further routes for exemption on other funds that you may be eligible for. For example, your state may allow you to qualify for exemption due to hardship.
Depending on the state you live in, different types of exemption may be available. Check your state resources online or speak to an attorney for more information about your options.
If you are dealing with a significant amount of debt and have exhausted all other options, you may want to discuss bankruptcy with your attorney. This should always be a last resort.
Bankruptcy is far from an easy out against debt. Sure, bankruptcy can shield you from some types of debt, but it will also have a huge impact on your credit score for years. Child support, spousal support and many student loans will still be due even if you are declared bankrupt.
Knowing how to manage debt well can go a long way, and help you avoid creditor garnishes and bank account levies down the line. It’s never too late to learn how to improve your financial habits and get a handle on your debt:
- Make full and timely payments: Avoid the temptation to pay only the minimum amount from your monthly payments. Aim to pay on-time and in full to tackle your debts and improve your credit score.
- Use the debt snowball method: One way to gain momentum in paying off debt is to use the debt snowball method. This involves paying off your smallest debt first, and then rolling what you had paid on that bill into the second smallest balance, and so on.
- Closely monitor your spending: Responsible budgeting is crucial to paying off debt successfully. You can use financial planning apps and online resources to help you stay on top of your expenses. The more you can do that, the more likely you are to make full on-time payments each month.
Yes. It is possible for a creditor to be granted legal access to some or all of the funds in a savings account. If a court deems you capable of paying even some of your debt, having money in a savings account isn’t enough to protect against garnishment.
Other than negotiating a plan to make repayments, protecting your bank account from garnishment may require seeking a legal exemption. Depending on the nature of the funds in your bank account, and the laws around exempt funds in your state, you may have other options.
Offshore bank accounts and property are completely safe and legal. However, if you’ve got assets over a certain value threshold held offshore, you will be required to report them in your tax report.
Using an offshore account to hide money, whether against taxation or debt collectors, isn’t a good idea.
Opening a new bank account isn’t a feasible way of avoiding creditors. Creditors have numerous resources available to find out the details of your financial situation. They might search national banking records, for example, or seek a court order if necessary.
You can open a new account and move funds there, but eventually, creditors will become aware of your new account.
It’s difficult to know how long the entire legal process that leads to garnishment can take. Depending on the state in which the case is filed, and the details of the court’s order, it could be weeks or months.
If you’re concerned about the possibility of wage garnishment, the best route would be speaking to an attorney who specializes in debt collection and garnishment cases.
While garnishment of your income is a worst-case scenario, it’s good to know that only a certain percentage of your wages can be legally garnished.
In most states, creditors who win garnishment rights to your income can take no more than 25%. This law falls under Title III of the Consumer Credit Protection Act (CCPA), limiting how much of a person’s income is subject to garnishment.
In certain cases, a creditor might seek a court order for a bank levy rather than wage garnishment. A bank account levy is much more severe than wage garnishment because the debtor’s account becomes frozen for up to a year.
With wage garnishment, creditors are essentially compromising and accepting a payment plan to recoup the outstanding debt. But if a creditor wishes to recoup a larger percentage of debt as quickly as possible, they may seek a bank levy instead.
Before you commit to avoiding creditors, remember that the easiest way out is to negotiate some kind of payment plan. You might be surprised by how small a payment your creditor is willing to accept.
Besides that, look for any exemptions available to you to protect your funds. Depending on the state you live in, you might also be able to claim a hardship exemption from garnishment.
You can also learn more about asset protection by speaking with a qualified legal practitioner.