Sometimes even the best planning can't prevent a situation of unexpectedly falling into debt.
Whether your family has had to rely on credit cards to survive a spouse's sudden unemployment, or an unexpected medical bill has put you in the negative by thousands of dollars — life happens.
Even scarier is if you haven't rebounded from a financial situation and a debt collector contacts you demanding payment. You might be wondering if they can take money from your bank account without authorization.
Here's what you should know about what debt collectors can and cannot do to access your bank account — and what you can do about it.
How a debt collector gets access to your bank account
Rest assured that a debt collector can't simply walk into your bank and take money from your account without authorization from you or a court decision.
"In most states, creditors cannot freeze your bank account without a judgment," says Leslie H. Tayne, an attorney specializing in financial debt resolution and author of Life & Debt.
"Typically, there would be a judgment put in place and then as part of the enforcement, a bank account execution, also known as bank levy, would then occur," she says.
Regardless of the terminology a creditor or debt collector uses, they'll need to get court authorization to seize money from your bank account.
How is this legal?
Aside from the obvious risk of losing your money, a bank levy freezes other day-to-day financial activities, like use of a debit card, withdrawal of funds at an ATM, and auto-pay services for other bills.
Before it gets to this point, it's important to know the early signals that a debt collector has you, and potentially your bank account, in its sights.
According to the Fair Debt Collection Practices Act (FDCPA), a debt collector is required to provide you with a debt validation letter outlining the details of the debt owed upon contacting you. When that happens, you'll have a 30-day window to dispute the debt or request a validation of debt.
If the collector fulfills their obligation in proving you owe the debt, and you don't pay up on the debt, then the debt collector can legally sue you. This is when the process of a bank levy officially kicks off.
If you're sued
If you are being sued, you may receive a letter with details of the lawsuit, and a court date and time with when the ruling will be determined.
If the debt collector wins the lawsuit, the court will place a judgment against you, basically acknowledging that you have a legal obligation to pay back the debt.
At this stage, the collector can then approach your bank, with the judgment in hand, and request a bank account execution to collect on the debt.
"The first action you should take is to call your bank," advises Tayne. "There are numerous reasons why your account could have been frozen and, therefore, each requires a different solution. The debtor can complete an exemption form if any of the funds in that account qualify."
According to Tayne, frozen funds can be held for as long as a year or more without getting withdrawn, depending on your local state laws.
If you have specific funds in the levied account that are protected from a bank levy — such as Social Security income, disability income, or spousal support — you can submit an exemption form for those funds to potentially regain limited access to them.
When a judgment might not be required
There are a few instances where a creditor might not need to go through the bank levy process to gain access to your bank account.
One example is if you owe a federal debt, such as a federal student loan or unpaid taxes, and your "creditor" is the U.S. government.
A court judgment isn't required for a government agency to recoup debt that is owed to them. This can be done in a few ways, such as levying your bank account, garnishing your wages, and reclaiming tax refunds.
Similarly, if a creditor you owe is also where you do your banking, your contract may include fine print stating that the creditor can withdraw funds from a deposit account from the same institution to clear debt that is past due.
How much money can a debt collector take from your account?
There are consumer protections in place that limit how much money a debt collector can take from your account. However, bank levy rules vary from state to state, and sometimes even within a state.
"Under the Exempt Income Protection Act in New York, your bank may never take or freeze the first $2,338 if you live [in] upstate New York. If you live in the five boroughs, [it's] $2,640," explains Tayne.
"[In] downstate Long Island, a bank can't take the first $2,750 in your bank or credit union account to pay a judgment, whether or not your account has exempt funds."
Depending on where you live, the number of exempt funds, amount thresholds, or types of funds that are exempt can vary which is why it's important to consult with a lawyer in your state to understand the rules you're up against.
In the meantime, you might consider deactivating any direct deposits into the levied bank account since as soon as the funds enter the account, you might not have access to them.
Can a debt collector go after a bank account that isn't in your name?
Having a debt collector go after your funds is worrisome enough, but that dread can escalate if you feel your loved ones' money is at risk by association.
If a bank account is solely in their name, their funds are likely not at risk of being levied or seized.
If you have a joint bank account, however, the way in which the account was originally created could make a big difference, depending on the rules applied to your state.
The law around whether a debt collector can levy an account that's not in your name also depends on if you live in a Common Property state and its specific rules.
Should you authorize a debt collector to access your account?
While an encounter may feel intimidating, you have rights when it comes to interacting with a debt collector.
In fact, the protections put in place by the FDCPA prevent debt collectors from being able to bully or harass you. This includes asking for your personal information, access to your bank account, and more.
"It's important to say as little as possible to creditors as you are legally not required to give any information to a debt collector unless you are subpoenaed, and then it is still your choice," says Tayne.
"I can't emphasize enough that anything you say during communication with a debt collector can and will be used to aid in the pursuit of your debt."
As Tayne suggests, if you are contacted, you're under no obligation to immediately share your information. Instead, make the creditor or debt collector do the work in hunting down your information.
Some ways they can do this include:
- Referring to past payment information, like electronic payments or checks
- Looking at old credit applications for hints of your bank's name
- Subpoenaing local banks and credit unions to see if you're a customer or member
What to do if you're concerned about money in your account being seized
If you're worried money may be seized from you account, putting yourself in the best position possible starts with you. Here are a few measures you can take as you sort out how to address your debt situation.
- Consider stopping direct deposits into at-risk accounts that are associated with your Social Security number.
- Speak to a lawyer who is knowledgeable about your state's debt collection laws.
- Familiarize yourself with the protections established under the FDCPA. Resources like the Consumer Financial Protection Bureau can also provide guidance on what financial protections may be available to you.
- Seek credit counseling with a reputable counselor. Credit counselors can offer help by contacting your creditors and negotiating lower balances on debt owed.