Sunday, August 12, 2012

Can Debt Collectors Seize and Garnish a Paypal Account?

If you're worried about a collection agency garnishing your Paypal account, then I probably don't need to explain the lawsuit and garnishment process to you in detail. In a nutshell, if a debt collector sues you and gets a judgment against you, the company can then go after your assets, seizing them in lieu of payment. Paypal isn't a bank, but that doesn't mean your Paypal money is safe from a collection agency's judgment.

Lawsuits and Garnishment

If you could pay, you would have done so
Collection agencies don't sue you with the hope that the summons will make you throw your hands up into the air and say, "Okay, okay. You win. I'll pay you now." If you were able to pay, you probably would have done so long before the case went to court. No, a collection agency sues you with the intention of seizing your assets. If its lucky, the collector will walk away with far more in interest, fees and court costs than it would have gotten if you paid the original debt to begin with.

You also probably know that collection agencies can garnish your wages, levy your bank accounts and put liens on your property – but just because these are the most well-known ways that collectors force you to pay off a judgment, that doesn't mean they are the only ways.

Garnishing Paypal

Just because you don't hear about collection agencies garnishing debtors' Paypal accounts very often, that doesn't mean it can't happen. Paypal funds are monetary assets, plain and simple, and if a judgment creditor knows about those assets, you can bet the ranch that it will pursue them to the full extent of the law.

The reason you never hear about collection agencies garnishing Paypal accounts is that, more often than not, the collection agency has no idea that the Paypal account even exists. The same principle exists here that exists with prepaid debit cards – if the debt collector doesn't know about it, it doesn't try to seize it.

How Debt Collectors Find Your Paypal Account 

After winning a judgment against you, the collection agency may request that the judge force you to return to court for something known as a "post-judgment interrogatory." During the post-judgment interrogatory, the collection agency's attorney asks you questions about your assets. If you don't show up for the post-judgment interrogatory, refuse to answer the attorney's questions or lie about your assets, you can be held in contempt of court. Not fun.

Where are the assets?
The collection agency's goal here is to find out where you've socked away all your assets so that it can seize them. The collector's attorney can force you to disclose bank account and employment information and information about any property you own. But the attorney can't force you to volunteer information. Your best bet in a post-judgment interrogatory is to answer the questions you are asked in the simplest way possible while still satisfying the requirements. In other words, don't volunteer that you have a Paypal account if the collection agency's attorney doesn't ask you about it.

Why Collection Attorneys May Not Ask About Your Paypal

My theory as to why collectors rarely find out about judgment debtors' Paypal accounts is that collection agencies are cheaper than Mr. Krabs. Because of this, they have a tendency to hire cheap attorneys fresh out of law school that didn't do well enough in the program to be offered a better job somewhere else when they graduated. If a collection agency is working with an inexperienced (and perhaps not too bright) attorney, it may not even occur to the attorney to ask the right questions.

Some collection agencies that have older, more experienced attorneys on staff to oversee the fresh meat. But old habits are hard to break, and if a lawyer has attended hundreds of post-judgment interrogatories and asked the same questions at each one, its a fair bet that he's going to continue to ask the same questions. If he didn't think to ask about Paypal 10 years ago, odds are he won't now either.

Lying to Collectors About Your Paypal Account

Just because lying at a post-judgment interrogatory could result in a debtor being held in contempt of court, that doesn't mean that there aren't debtors out there who do just that. I'm not advocating illegal behavior, but I should warn you that lying about the existence of your Paypal account doesn't guarantee that you can protect it.

If a judgment creditor requests bank statements from your bank, your bank can do one of two things: hand over the statements without question simply because the creditor has a judgment (and is probably already levying your account) or refuse to comply until the debt collector comes back with a court order. Odds are the collection agency isn't going to bother to go get a court order just to check your bank statements, but if your bank hands over those statements and you lied about your Paypal account, you could find yourself in legal  hot water.

Don't lie about your Paypal

In order to be verified, Paypal accounts must be linked to a bank account or credit card. If your Paypal account is linked to a bank account and you regularly transfer funds from your Paypal to your bank, those transfers are going to show up on your bank statements and the collection agency is going to want to know where these transfers are coming from. If the bank is willing to pony up that information or if the statements themselves show that the transfers are Paypal transfers (some do, some don't), you're busted.

Protecting Your Paypal From Collectors

You are strictly prohibited from transferring assets to another person to keep them out of your creditors' hands. But Paypal gives you the option to request a check for the amount present in your account. Transferring the money to your bank account and then trying to withdraw it is risky. If you have a levy on your account or if the collection agency places a levy on your account after you initiate the Paypal transfer but before the money arrives, your Paypal funds are gone, gone, gone.

This isn't to say that if the collection agency finds out that you cleaned out your Paypal account before it could get there that it won't claim you were trying to hide assets. The odds of the debt collector going back to court to throw a fit about this in front of a judge is small, since that would require time, effort and money on behalf of the collection agency and the collector would have to prove that you intended to hide the money. Regardless, be aware of the risks of anything before you do it.

Paypal Could Freeze Your Account

One last thing to be aware of: Paypal could freeze your account. I read a quote somewhere that resonated so much with me that I'd like to mention it:

Paypal can put your  money on lockdown
"Paypal works great until it doesn't."

Those of you who have lost money and struggled mercilessly with Paypal after an account freeze know exactly what I'm talking about. Paypal can place a hold on your funds anytime for any reason. There is no guarantee that Paypal wouldn't be willing to do just that if the collection agency contacted it and requested that it do so pending a garnishment.

What it all boils down to is that I hate to see people lose everything to a garnishment, but I also don't want to see any of you guys end up in legal trouble just trying to protect money that's rightfully yours. You can't know what a collection agency is planning and lawsuit threats are often just that – empty threats – but to avoid potential legal problems down the road its always best to do what you have to do before the collection agency files its lawsuit and tries to garnish your Paypal account.

Related Posts:

Can Collectors Garnish a Prepaid Visa Debit Card?

Funds Exempt From Bank Account Garnishment

How to Respond to a Bill Collector's Lawsuit


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  3. Well...I just read through Paypal's terms and conditions, and they will suspend your account if your credit rating is not up to snuff...and that includes them holding the money in their in case there are charge-backs.

    1. Are you referring to the Paypal credit card? Paypal does not have permissible purpose to pull the credit histories of people who have a standard Paypal account, so they'd have no way of knowing what was on their customers' credit reports. The only way I can see this happening is with the credit card.