You go to pay a supplier and the business checking account is frozen. Now you’re paralyzed. You need to pay employees, but you can’t access any funds. What do you do now? Are you stuck?
What has happened, in most cases, is a bank levy. An account levy is a tool used by creditors to collect debt. A creditor can use an account levy to seize money that your business keeps in a bank account. In most cases, creditors use a judgment, which is a court order obtained after filing a lawsuit against the business, to get permission to levy your bank accounts. The IRS, however, can levy a bank account for unpaid back taxes without getting a judgment or court order. Defaulted federal student loans can also lead to a levy through an administrative garnishment process, and a few jurisdictions allow creditors to levy bank accounts without a court judgment.
For a private creditor, though, the levy is usually the last step in a long process. It starts with the debt itself, whether a loan, a credit card or a tax bill, and a business that misses a payment. Usually, the creditor will try to work with you. If the payments keep falling behind, the account might get turned over to a collection agency. The debt may also be sold to a debt buyer. The creditor files a lawsuit against the business to collect its money. Service of process lets the debtor know that it has been sued. If the defendant successfully answers the lawsuit and the creditor’s case is dismissed, then no bank account levy. But if the court rules in favor of the creditor, then the court will issue a judgment confirming the debt and the amount owed.
However, a judgment is just a piece of paper and doesn’t make you pay. Creditors next ask the courts for a writ of execution (a court order authorizing their collection efforts). Once the creditor has a court order, they have the “key” to open your checking account and collect the debt. In some states, the process is longer. It requires sending a notice to the debtor. That notice is a final chance to settle or negotiate payment terms. Elsewhere, the levy can come with no warning at all. The creditor serves the writ on your bank. Once the bank receives the levy notice, it must freeze your account. But the money doesn’t go to the creditor right away. There is usually a hold period, often 15 to 21 days depending on where you are, during which your business may be able to negotiate a settlement or otherwise avoid the loss of funds. It is also the time to challenge the levy. If nothing changes before the window closes, the bank then transfers funds from your account to the creditor. The levy comes off only once the debt is satisfied or repayment has been arranged.
Devastating Impact on Small Businesses
Freezing bank accounts has a devastating impact on small businesses. It can freeze up an entire company, especially if it’s the only account. If your checking account is frozen, you can’t pay employees, rent, or cover your other bills. Outstanding checks and automatic payments may still try to clear while the account is frozen. Of course, this also leads to bounced checks and potential overdraft fees. The bank may also charge a fee for processing the levy, and take it out of your account. Then there’s your credit. The levy itself may not directly affect your credit score, but the debt behind it, and the missed payments that led to the lawsuit, will almost certainly appear, or will already have. These hits to your credit score reduce your access to loans and lines of credit. A good credit score is an essential business asset, both for the company and for its owners.
Federal Law Exempts Certain Funds
The good news is that not all money can be taken. Federal law exempts certain funds from a bank levy, including Social Security, Supplemental Security Income (SSI), veterans benefits, student loan disbursements, FEMA aid, and federal, civil service or railroad retirement benefits. IRS levies work a little differently. If you can prove that losing the money is causing an immediate economic hardship, you may be able to get your account unfrozen while you get the IRS to agree to other payment terms. The tax debt itself does not go away.
Settle the Debt
So can you still settle the debt once your account has been levied? Yes. The period between the bank levy and the transfer of funds to the creditor is your chance. Using that window, the creditor may agree to a settlement or repayment plan. Some creditors may offer a settlement, allowing you to pay a reduced amount to close the debt. You may also be able to negotiate payment plans. If you come to an agreement, the creditor may agree to release the levy. Will the money come back? There’s no guarantee of any funds being returned once the levy is set in motion. That’s why, if a settlement is possible, it’s important to negotiate one as soon as you get the bad news about your bank account. So, make a call and have that conversation. If you have been putting off that call, now is the time to make it, even after the account has been frozen.
Before making the call, though, do your homework. Start with an attorney who handles debt settlement or judgment relief. A lawyer can look at the levy and tell you whether it was done properly and whether there are legal grounds to challenge the levy. The lawyer can also discuss whether any of your funds are exempt. You can file an “exemption claim” to fight the levy and ask the court to release the funds. If there are legitimate grounds, you can also challenge the levy itself, for example by showing that the debt is not yours, that the statute of limitations has expired, or that you were the victim of identity theft. If the levy can’t be challenged, or you don’t have exempt funds, then you can negotiate the settlement with the help of your attorney.
If you can’t settle the debt, or if you have other, bigger problems, then bankruptcy may be the way out. Filing can stop most bank levies, but it belongs at the end of the list because of the harm it does to your credit and financial stability. Many people think bankruptcy is a debt relief option that can solve every financial problem. In some situations, that may be the case. In others, it may not be the right solution. Every situation is different. The best way to know is to consult with an attorney and get an opinion.
What do you do when your business checking account has been frozen? Don’t panic. Use the short window before your funds are transferred to the creditor to settle or negotiate repayment terms. While levies can be overwhelming, the key is to act quickly and get good help. Whatever you do, call sooner rather than later.
