Few things stop a business cold like a bank levy. When the levy is executed, the bank account is frozen and the business owner can no longer access the money. You would not be able to use the funds for payroll, suppliers, utilities, etc. Businesses need their accounts to run their operations, and an account is critical to being able to pay employees. This can be a serious blow to your operation. So can a debt settlement stop a bank levy? Often it can. If the creditor can get you to agree to pay a settlement or to set up a payment plan, the creditor may be willing to release the levy. But to use that option well, you need to understand how a levy happens and how little time you have once it does.
A Bank Levy Is a Post-judgment Remedy
A bank levy is a post-judgment remedy, meaning that it comes after a judgment has been entered against the debtor. A bank levy is when a creditor collects on a judgment by extracting money from the debtor’s bank account. That is the general rule, and it means a creditor can’t simply decide to levy your account. There are a few exceptions though. The IRS can levy a bank account for unpaid back taxes without having to go to court and defaulted federal student loans can lead to an administrative garnishment without a judgment, and some states allow a creditor to issue a levy before judgment. Unfortunately, there’s nothing magical about small business bank accounts to shield them from a bank account levy.
You are probably wondering how your business got to this point. It usually starts with missed payments that pile up until the debt goes into default. Then the creditor puts the business account into internal collections, or sells it to a third party debt collector. If the debt still isn’t paid, the business gets sued. It is served and has time to answer; it can negotiate a settlement or attempt to get the case dismissed. If neither happens, the case goes to court. If the court rules against the business, it issues a judgment in favor of the creditor. Now the creditor has the ability to garnish wages, place a lien on its property or levy its bank account.
To levy the bank account, the creditor files a request with the court to issue a writ of execution (or other similar document). The creditor then serves it on the bank, and the bank is obligated to freeze the funds in the business’ account. In some states, a written notice to you is required before the levy, giving you one last opportunity to negotiate. In other states, no notice is required and the bank simply freezes the account. When a bank account is frozen, you can’t spend the money in your bank account – whether you are at an ATM, writing a check or making a purchase. You will not be able to transfer the money in your bank account to another account, either.
The levy gives the creditor the right to take the funds, but it doesn’t mean the funds are instantly transferred. There is usually a “hold” period which lasts anywhere from 15 to 21 days, depending on the jurisdiction. During this time, the business can attempt to file a challenge to the levy or work out a payment plan with the creditor. If you take no action, the bank will wire the funds to the creditor once the hold period expires. If the debt is satisfied or you and the creditor agree to a payment plan, the levy is lifted. So the best approach is to address it quickly by either fighting the levy or negotiating with the creditor.
The Levy Does Damage of Its Own
Meanwhile the levy does damage of its own. If you have checks still out or automatic payments scheduled, they might bounce, leaving you with overdraft fees. The bank may deduct its own fee for dealing with the levy from the remaining balance. Your credit score might not be affected by the levy itself, but your inability to pay your creditors in full, and any late or missed payments, will affect your credit score. This could hurt your ability to get loans in the future. Then there is the stress of keeping the business up and running, of keeping employees motivated to get up and coming to work despite the difficulty of managing the cash-flow, of keeping the doors open when you can’t cover your everyday obligations. All of a sudden you are in a situation you can’t control.
Not every dollar is fair game, though. By federal law, Social Security payments, Supplemental Security Income (SSI), veterans benefits, student loan disbursements, Federal Emergency Management Agency (FEMA) aid, and federal, civil service, and railroad retirement payments are protected from a levy. If any of that money is in the account, you may be able to claim an exemption. A claim of exemption is a document filed with the court by a debtor that asserts certain property is exempt from execution. Tax levies have one more wrinkle. The IRS can release the levy in certain cases, such as when it causes immediate economic hardship, but the debt still remains. A released levy unfreezes the account, but you still have to make other arrangements with the IRS to pay what you owe.
Negotiating a Settlement or an Installment Agreement
Which brings us back to settlement. At the end of the day, a bank levy is just a way for the creditor to force you to pay the debt. The bank levies your account because your creditor wants to collect on your debt. Therefore, it’s logical that if you change your debt status, you can change the levy status. Negotiating a settlement or an installment agreement with the creditor or collection agency does exactly that. The creditor may agree to let you pay it down over time, and to release the levy in return. This is because it’s much better to get paid something than nothing. A creditor doesn’t have to agree to a settlement, so it’s important to offer one and try to work something out. Yet many people don’t settle the debt because they feel they can’t. They think that since they can’t repay it in full, there is nothing to negotiate. That couldn’t be more wrong. Having cash on hand and ready to be sent with a payment is going to impress the collection agency or creditor. You want to do it within the hold period, before the money leaves your account.
Timing cuts the other way, too. The best time to settle is before the bank levy. If the bank levy has already been placed, you have much less control over the process. Even in litigation, you can make a settlement offer without repaying the debt in full. A deal reached before judgment keeps the case from ever getting to the point where your bank account is at risk.
If negotiation is not an option, the levy can be challenged in court if there are legitimate grounds for doing so. Grounds for challenging a levy can include expiration of the statute of limitations, identity theft, or the fact that the debt is not actually yours. Levies issued due to an error are easier to reverse. While bankruptcy can stop most bank levies, it should be a last resort due to the negative impact on credit history and financial stability.
Whichever path you take, get legal help early. An attorney experienced in debt settlement or judgment relief can evaluate your situation, explore your options and advise you on the best course of action. And if a creditor is already circling, remember that the sooner you settle your debts, the better off you are.
