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3 Reasons Banks Can Freeze Your Account

Chloe Meltzer | October 19, 2022

Wage garnishment is not as good as it may sound.

Summary: Has your bank account been frozen? Here's SoloSuit's guide on 3 possible reasons why and how to unfreeze it.

>>Read the NPR story on SoloSuit

If you have overdue debts, you may suddenly realize that your bank accounts have been frozen. This is only after a default judgment has been awarded against you to a creditor or debt collector to whom you owe money.

If it has gone this far, then a creditor or debt collector may be awarded a bank account levy, attachment, or garnishment. This allows them to withdraw money from your account to pay off your debts, but it also means that you cannot access your account while it is frozen. Outstanding checks won't clear either, and you will not be able to make transfers. If you attempt to do any of these things, you may receive fees for having non-sufficient funds in your account.

Understanding the reason why your account is frozen, and how to stop it, might be essential to your financial situation.

Here's why creditors can freeze your bank account

If a creditor files a lawsuit and is awarded a judgment against you, then they often are given the right to freeze your bank account. If the creditor wins the suit against you, then they are often awarded a “money judgment” which forces you to pay a certain amount owed.

If you do not pay the judgment or pay on the schedule that you agreed to, the creditor may then request for your bank to freeze your account and satisfy your debt. This is then referred to as a garnishment.

It is good to note that federal agencies, such as the Internal Revenue Service (IRS) or the U.S. Department of Education, do not need a judgment to garnish. As long as they have given you notice of intent to garnish or levy, they can do so. The same can be said for child support.

What happens when your account is frozen

When your account is frozen, it means that your funds are inaccessible. You will most likely be unable to access your funds until your debt is paid back, or until you are able to have the freeze removed. You cannot take money out of your accounts, and any payments will not go through.

You may notice that the bank has frozen your account because a check will bounce back if you have written or cashed a bad check. This will be treated as though you do not have enough money in your account and may even be flagged as fraud. If you have payments that try to go through, the payments will bounce and you may end up paying a charge for not having sufficient funds. This happens regardless of if you have funds in your account or not, because such funds will not be accessible.

If a creditor seeks judgment against you, then you should expect your credit score to go down. The judgment will also stay on your credit report for up to seven years. This can hurt you in the future if you attempt to buy a home, get a loan, and even get an apartment.

3 reasons banks can freeze your account

1. Suspicious or Illegal Activity

If your account seems to have suspicious or illegal activity, a bank is allowed to freeze an account. This is specifically if they believe one of their account holders has been conducting illegal activities. Bankers became more strict after the events of September 11, 2001 due to certain criminal enterprises that have used financial institutions to conduct business over the years. It is common for banks to monitor accounts for money laundering anyway, which is when large amounts of money are deposited into bank accounts to seem legitimate.

If your bank has suspected that you used your account illegally, they can also close your account without any notice. It can also prevent you from doing business in the future. If, however, you are not doing an illegal activity, then you should contact your bank immediately to clear this up and remove the freeze.

2. Unpaid debts through creditors

If you have unpaid debts, your creditors may be able to get the bank to freeze your account. They would then be able to go into your account and pull money to pay off your debt. They must first get approval from the courts by getting a judgment against you. The judgment would then be sent to the bank, and they would have this on file.

It is also important to be aware that if you have a defaulted loan at the same institution as your bank account, the lender can access your account to pay the defaulted loan without obtaining a judgment. You agree to this when you sign the loan.

3. Unpaid debts to the government

If you owe student loans or taxes to the government, you might find your bank account automatically frozen by the Internal Revenue Service (IRS). They can issue a tax levy for any unpaid taxes, which will not be lifted until the debt is fully paid.

The government can do a few different things for unpaid student loans. They can either take your tax refund or garnish your wages. Garnishing wages is more common without pursuing a judgment from the courts.

However, even if your bank account is frozen because of debt collectors, your bank cannot be wiped completely. There are laws that govern how much can be garnished based on the state you live in. Additionally, there is a limit to what type of income can be taken from you. For example, in certain states, it is illegal for creditors to withdraw Social Security benefits, child support, or workers' compensation. When your account is frozen, you will need to file a claim of exemption within 10 days.

What to do after your bank account is frozen

When your bank account is frozen, you may have automatic deposits that you can no longer access. The issue with a frozen bank account is that it will allow those deposits to go in, but you will not be able to get them out. This means you will be risking all of your new money as well. So, if your account is frozen, you should stop direct deposits so that you can have access to your money.

Fighting a bank levy

When you receive a notice of a bank levy, you will also be given information that includes your rights, how to object to having your funds frozen, and who the creditor is. If you wish to challenge the levy, there are a few things you can do.

First, you should check the statute of limitations on the debt, which is the legal time period that a creditor has to sue someone for debt. The statute of limitations is different in every state. If the debt is within the time limit, you can try reaching out to the creditor to negotiate a payment plan. Many creditors and debt collectors are willing to work with you if you're in a financial bind.

Finally, you can turn to legal means to fight the bank levy. If you never heard about the lawsuit, and therefore lost by default, you can try filing a Motion to Set Aside Judgment (also known as a Motion to Vacate Judgment). This type of motion asks the court to void the judgment and gives you time to respond to the lawsuit. This can stop bank levies in their tracks. .

Let's consider an example.

Example: Marcos tries to withdraw some money from his bank account in California, and he is told that his funds have been frozen. He does some investigating and finds out that he was sued for an old credit card debt, did not respond in time, and lost by default. The creditor is now coming after his account to get the funds back. Marcos finds out that you have 180 days to file a Motion to Vacate Judgment in California to reverse the court's decision. He uses SoloSuit to create the motion document and submits it to the court. The court accepts his motion, and Marcos is free to properly respond to the lawsuit and access his bank account again.

Here's how to prevent your bank account from being frozen

There are steps that you can take in order to avoid having your bank account frozen or to attempt to have your funds released if they have been frozen.

Never ignore a debt collector

If you want to avoid having your bank accounts frozen, then it is important to always respond to debt collectors. The goal would be to pay off your debts, if possible, but if this is not possible, then you can attempt to settle the debt. Usually, you would settle the debt by paying a lump sum for less than owed or agree to a payment plan. In many cases, especially government entities, if you ask for the attachment to be released after scheduling a payment plan, they will comply. You can always contact the creditor to see if you can make a deal.

Direct deposit all government assistance funds

There are laws in place which require banks to review anyone who is subject to a frozen account. If you have government benefits, such as social security, that are deposited directly into your account, that money cannot be frozen.

Additionally, any money from your benefits deposited within two months prior to the garnishment cannot be frozen either. The bank is required to make sure that you have at least two months worth of Social Security benefits in your account available. The only exception is for past-due child support and federal taxes.

If your Social Security deposits are mixed in with other funds, or you have more than two months of deposits in the same account then some of your funds can be frozen.

Claim exemptions

There are also some funds that are exempt from being frozen due to specific state laws. If these funds are frozen, you can file a paper with the court explaining the specific exemption, and why you believe you qualify for the exemption. You will also need to request a court hearing where you will have to ask for them to lift the freeze on your funds. Funds that are exempt from garnishment include the following:

  • Veterans Administration benefits
  • Federal student loans
  • Social Security disability benefits
  • Social Security retirement benefits
  • Aged, Blind, or Disabled (ABD) benefits
  • Child support
  • Supplemental Security Income (SSI) benefits

Respond to a debt lawsuit to avoid a frozen bank account

The best way to avoid garnishment or bank levies is to respond to a debt lawsuit as soon as you receive notice of it. Most Americans do not know how to respond to debt lawsuits, so they ignore them, and this leads to a default judgment against them. The default judgment gives the debt collector or creditor the right to garnish wages, freeze bank accounts, and seize property. You can avoid a frozen bank account by filing a written Answer to the lawsuit in court.

Here are 3 most steps to respond to a debt lawsuit:

  1. Create an Answer document where you respond to each claim listed in the Summons and Complaint
  2. Include a section where you assert your affirmative defenses
  3. File your Answer document with the court and send a copy to the plaintiff

Check out this video to learn more about each step:

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How it works: SoloSuit is a step-by-step web-app that asks you all the necessary questions to complete your answer. Upon completion, you can either print the completed forms and mail in the hard copies to the courts or you can pay SoloSuit to file it for you and to have an attorney review the document.

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