If a creditor has obtained a judgment against you, it may attempt to seize funds in your bank account. This is called a levy. If a judgment creditor tries to levy your bank account, you may be entitled to exemptions that will allow you to keep some or all of your money. How much you can exempt—that is, keep safe from seizure by creditors --will depend on the amount of money you have in the account, the source of that money, and the laws of your state.
Federal law protects certain types of benefits against attachment by creditors. Those benefits include:
- Social Security and Supplement Security Income (SSI)
- federal, civil service, and railroad retirement benefits
- veterans’ benefits
- student loan disbursements and aid, and
- FEMA aid.
These benefits do not lose their exempt status, even when you cash the checks.
Direct Deposit of Benefits Provides More Protection
It's best to use directly deposit to deposit government benefits into a separate bank account. Accounts that receive electronically-deposited benefits cannot be automatically frozen if a judgment creditor tries to levy it. If you choose to receive paper checks instead of direct deposits, then your account may be frozen. In that case, you will have to take extra steps to prove that the funds are exempt before you can release the hold on your account (at least to the extent of the funds traceable to the exempt benefits).
Exceptions to Federal Exemptions
There are exceptions to these federal exemptions. If you have too much money in your account, or if you owe money on a certain type of debt, then your account may still be levied.
The Two-Month Rule
If your account contains more than two months' worth of deposits, then a judgment creditor may be able to seize that account. You will be allowed to keep up to two months of benefits. A judgment creditor may get the rest.
Your account may still be attached if you owe money for:
- child support
- spousal support
- overdraft fees, debts and other charges to the depositing bank
- student loans, and
- federal taxes.
State Law Exemptions
The laws of your state may provide even more protection for funds in a bank account. State laws vary widely as to the type of funds that are protected from levies, the amount of funds you can claim exempt, and even whether the judgment creditor can seize your account at all. While each state is different, there are some common exemptions that may be available to you.
Many states exempt a certain percentage of an individual's income from garnishment by judgment creditors. In many cases, that is 25% of “disposable earnings,” or the amount of earnings after taxes and other required deductions. If your state allows you to exempt a percentage of your disposable income, then you may be able to claim the income exemption even after you deposit the paycheck into your account.
(To learn more about wage exemptions, see Wage Garnishment Limits.)
If you receive state benefits, and deposit those benefits into the account that the judgment creditor is trying to levy, you may also be entitled to exempt funds in your account up to the amount of those benefits. Typical state benefits that may be exempt include:
- public assistance
- workers compensation
- state government retirement benefits, and
- disability benefits.
Other Benefits and Support
Other types of benefits that may be exempt by state law include:
- pension and retirement benefits (ERISA and non-ERISA)
- child and spousal support, and
- certain types of insurance benefits.
Blanket or “Wild Card” Exemptions
Many states allow general exemptions, to be applied to any property of your choosing (including bank accounts), up to a certain dollar amount. These are sometimes called “wild card” exemptions. The amount of a wild card exemption can range from $500 to $10,000, and can often be stacked on top of your other available exemptions.
Your entire account could be protected with this option. For example, if you live in Illinois and have $1,000 in your account, you can use your wild card exemption of $4,000 to exempt the whole account from attachment.
Exceptions to State Exemptions
As with federal exemptions, there may be exceptions if you owe taxes, child support or other type of special debt depending on your state's laws. You may also be denied an exemption if you are unable to prove that the source of the money you deposited in the account came from an exempted source.
Special rules may apply that could offer additional protection, or limit exemptions, if you own the account jointly with someone who does not owe the judgment creditor.
Just because the funds in your account may be exempt doesn't mean they are automatically protected, especially if they did not come from electronically-deposited federal benefits. Many times, the bank will automatically freeze an account temporarily while the court sorts out everyone's rights to the money. You may have to step forward and claim the exemption, usually within a short period of time after you receive notice of the bank levy. If you do not claim the exemption, then you may lose that money.
(Learn more about bank levies and wage garnishment.)