Can a creditor or debt collector seize money from your bank account if you can’t pay your debt? It’s a terrifying scenario to someone who is just getting by and needs every penny to put food on the table, gas in the tank, and to pay their essential bills. Several of our readers have expressed this fear, or experienced it, firsthand:
- Joan wrote that she was unemployed and was worried about a creditor taking money out of her bank account.
- “Non” said a creditor wiped out her savings account.
- Another reader said their bank account was seized to satisfy a court judgment they thought was taken care of when they were taxed for the “canceled” debt.
Here, bankruptcy attorney Eugene Melchionne explains how it works in Connecticut, the state where he practices. The rules and procedures may be different in your state.
The first line of protection you have is the courts. Typically creditors can’t just dip into your bank account; they first have to get a court order to do so. Often that means they must successfully sue you and then get a judgment. Melchionne explains:
“In Connecticut (and in most states and in most situations), a creditor can only seize a bank account on a debt with a court order. This is usually after a judgment enters and other conditions exist (such as failing to pay the judgment). In Connecticut, this is called an ‘Execution of Judgment on a Bank Account’.” He notes that “sounds ominous,” and for someone facing that, it probably is.
In rare circumstances, he points out, there may be procedures that allow a creditor or collector to seize funds before judgment has been entered. But it’s not typical for most consumer debts.
However, there’s one very important exception: When you owe money to the same financial institution that holds your account, your money may be fair game.
Your Money Is Our Money
I have a car loan through the same credit union where I have a savings account. When I opened that account, the paperwork I signed clearly indicated that the balance in my account could be used to pay a debt owed to the credit union.
This is known as the “Common Law Right of Setoff,” says Melchionne. “This is where the state follows the old English Common Law and the bank account is held in the same bank to whom the money is owed. In those cases, the bank (or credit union) has the right to invade the bank account and take the money to satisfy the debt.” This action does not require a lawsuit or judgment first.
And even in states that don’t recognize this common law, Melchionne says that financial institutions typically make this part of the contract. “This is why I always advise my clients to move their bank accounts if they also owe money to that institution,” he adds.
But I Can’t Afford It
Chances are, if you have unpaid delinquent debt, it’s because you can’t afford to pay it. Having all or part of your bank account seized would likely create a hardship when it comes to paying other bills. Missing payments on other debts may, in turn, hurt your credit scores and compound your problems. Again, there may be some consumer protections in your state, but only if you know how to exercise them.
“Usually there are some safeguards such as a minimal amount that can be exempt from seizure in the account (in Conn., it is $1,000) and a procedure for claiming that exemption,” says Melchionne. “However, if you do not follow the procedure (for exercising your consumer protections), you could lose the entire bank account to the creditor, not to mention the bank fees for administering the court papers. (It seems they have a fee for everything.)”
Joint Account Danger
If you share a joint savings or checking account with someone who is delinquent on their bills, you run the risk that the account could be seized — including your funds in the account. “If it is truly a ‘joint’ account, then both parties to the account (or three or four) are all considered 100% owners of the account at all times,” he notes. “So a judgment against one of the owners is as good as a judgment against all of the owners of the account, which is to say an execution filed against any one owner can result in loss of the entire account.”
Exception to the Rules
Of course, like any area of law, there are exceptions to the rules. “There are whole books written on this subject,” says Melchionne. But a few key exceptions are worth pointing out. If the only funds in your account come from sources like Social Security income, those funds may be protected under a regulation titled “Garnishment of Accounts Containing Federal Benefit Payments.” In addition, custodial or trust accounts get different treatment, says Melchionne, and “some states recognize ‘Tenancy by the Entirety’ or ‘Community Property’ which gives a spouse special rights in marital property or property acquired during the marriage.” Talking with a consumer law attorney in your state is one of the best ways to find out what laws apply to your situation.
How to Protect Yourself
First, be very careful about allowing a friend, relative or significant other to share your checking or savings account. It’s particularly risky if they can’t get their own account because they have credit problems. Your funds could literally be at risk if a creditor comes after them.
If you have unpaid debts, it’s essential that you get your free annual credit reports to find out whether there are any judgments listed. Then take advantage of free credit monitoring tools to watch for changes in your credit scores (which you can check for free on Credit.com) that could indicate a new collection account or a new judgment. Surprisingly, a significant number of consumers don’t realize that they were sued for a debt and that the creditor or collector obtained a judgment — often because they didn’t show up.
If you discover there is a judgment against you, or if you are being sued for a debt, talk with a consumer bankruptcy attorney. (You can find one through the National Association of Consumer Bankruptcy Attorneys.) Even if you don’t want to file bankruptcy, the attorney can explain what the creditor may be able to do to collect from you — including whether they may be able to seize money from your checking or savings accounts. If it’s unlikely you’ll be able to pay the debt soon, bankruptcy may be your best option for protecting the money in your accounts and putting the debt behind you.