How Debt Collectors Freeze Bank Accounts
A collection agency can't simply call up your bank and demand that it freeze your accounts. A freeze can only occur after the collector obtains a judgment. If you live in a state that allows private creditors to place a hold on your bank accounts (and to the best of my knowledge, Delaware is the only state that does not permit the practice) the collection agency serves the judgment paperwork--generally a writ of execution, but the correct procedure will vary by state--on your bank. The bank must then freeze the funds in your account for a period of time ranging from 10 to 20 days. During this time, you have the right to contest the freeze and attempt to have it lifted. After the freeze period expires, the collection agency levies the amount you owe (or the entire balance, if its less than what you owe) from your bank account.
Read More: Checking Account Garnishment
Bank Account Freeze and Garnishment Exemptions
State laws vary wildly when it comes to releasing frozen bank accounts. One rule of thumb here, however, is that if you have exempt funds in your bank account, you have to notify the collector and the bank. A collection agency cannot legally levy funds it knows to be exempt. The following forms of income are exempt from seizure by collection agencies:
- Social Security
- Veterans' benefits
- Child support
- Federal employee retirement benefits
- Railroad retirement benefits
- Welfare benefits
There are exceptions to this rule. If the collection agency is working to collect a government debt, such as unpaid taxes, student loans or child support, it may seize exempt funds from your bank account.
Read More: Student Loan Collection
How to Release a Bank Account Frozen By Collectors
New federal regulations require banks to examine accounts and automatically exempt any federal benefits or other exempt payments from the freeze and subsequent garnishment. That doesn't mean that the system works perfectly. In some cases, its up to you to ensure that your bank doesn't hand over your exempt income to a collector with a judgment. Most states require banks to notify you of an account freeze and give you instructions for contesting the freeze before allowing a debt collector to levy the account.
In some cases, its up to you to prove that the frozen funds in your bank account are, in fact, exempt from garnishment. You can generally request exemption forms from the bank. By claiming your exemptions and providing both the bank and the collection agency a copy, you are notifying them that they cannot legally take your money. If the collector chooses to levy your account anyway, the fact that you previously notified them that the money was exempt gives you leverage to go to court and fight to have your exempt funds returned.
The OCC has a rather thorough FAQ regarding bank account freezes and garnishment that may help some in this situation. You can find it here: OCC FAQ
Frozen Non-Exempt Bank Accounts
Unprotected funds in your bank account that may be frozen include tax returns, paychecks, savings, gifted money, etc. If the collection agency knows where you bank, it could freeze your bank account and seize these forms of income at any given time after winning a judgment against you.