Tracing Exempt Funds in a Florida Bank Account

Exempt funds deposited into a bank account do not automatically lose their protected status, but the account holder must be able to trace each dollar back to an exempt source if a creditor serves a garnishment writ. Tracing is the process of identifying which funds in an account originated from protected sources and which did not. The burden falls entirely on the debtor.

Florida recognizes several categories of exempt deposits, and each carries different tracing rules. Some receive automatic protection from the bank itself. Others require the account holder to affirmatively prove the exempt character of the funds at a court hearing. Understanding how these categories interact within a single account is central to protecting a bank account from creditors.

Categories of Exempt Deposits

Not all exempt funds receive the same level of protection once deposited. The differences matter most when a creditor garnishes the account and the debtor must prove what portion of the balance is protected.

Federal Benefit Payments (Automatic Protection)

Federal benefit payments deposited by direct deposit receive automatic protection under 31 CFR Part 212. When a bank receives a garnishment order, it must conduct an account review within two business days and calculate a “protected amount” based on the preceding two-month lookback period. The bank identifies all federal benefit deposits made by direct deposit during that window and establishes a protected amount equal to the sum of those deposits or the current account balance, whichever is lower.

The bank must leave the protected amount accessible to the account holder without any action by the debtor.

The federal benefits covered by Part 212 include Social Security retirement and disability payments, Supplemental Security Income, Veterans Affairs benefits, Railroad Retirement benefits, and federal civilian and military retirement payments. The automatic protection applies only to electronically deposited benefits. Paper checks deposited manually do not trigger the automated lookback.

Funds above the protected amount remain subject to the garnishment order and may be frozen. If the account holder believes those additional funds are also exempt under state or federal law, the debtor must file a separate claim of exemption and prove the exempt character of the additional funds through the standard court process.

Head of Household Wages (Six-Month Window)

Wages deposited by a debtor who qualifies as head of household under Florida Statute 222.11 remain exempt for six months after the financial institution receives them. The debtor must be able to trace and properly identify the funds as earnings. Unlike federal benefits, deposited wages do not receive automatic protection from the bank. The debtor must file a claim of exemption and present documentation to the court.

The six-month clock runs independently for each deposit. Wages deposited in January lose their exempt status in July regardless of whether more recent deposits still fall within the six-month window. As older deposits age out and the debtor withdraws funds for living expenses, the traceable exempt balance fluctuates over time.

Retirement Distributions

Distributions from qualified retirement accounts, including IRAs, 401(k) plans, and pension plans, are exempt from creditors under Florida Statute 222.21. Florida courts have held that the exempt character of retirement funds survives withdrawal and deposit into a bank account, provided the funds remain traceable. There is no statutory time limit equivalent to the six-month window for wages, but the practical ability to trace diminishes over time as deposits accumulate and withdrawals draw down the balance.

Life Insurance and Annuity Proceeds

Cash value withdrawn from a life insurance policy and annuity payments received by a debtor are exempt under Florida Statutes 222.13 and 222.14. Florida courts have applied the exemption to funds after deposit into a bank account, and the protection survives so long as the funds remain identifiable. Commingling with non-exempt funds can defeat the exemption if the debtor cannot reconstruct which dollars trace to insurance or annuity proceeds.

Other Protected Sources

Additional categories of exempt deposits include disability insurance benefits under Florida Statute 222.18, workers’ compensation payments, unemployment benefits, and alimony or child support payments received by the debtor. Federal law separately protects Social Security Disability Insurance and SSI payments from most creditors, and state exemptions may extend additional protection to other categories of income.

How Tracing Works

When a creditor serves a garnishment writ, the bank freezes the account. The debtor then has 20 days to file a Claim of Exemption and Request for Hearing. At that point, the debtor must demonstrate which portion of the frozen balance originated from exempt sources.

The Documentation Standard

Courts expect the debtor to produce a clear record connecting each deposit to a specific exempt source. The relevant evidence typically includes bank statements covering several months before the garnishment, showing the amount and date of each deposit alongside its source. Pay stubs or payroll records confirm wage deposits. Benefit award letters from the Social Security Administration or the VA establish the amount and frequency of federal benefit payments. Tax returns and IRS transcripts can confirm head of household status and support the debtor’s claimed dependent relationships.

The debtor must reconstruct the account’s deposit and withdrawal history in enough detail to show that the remaining balance, or some identifiable portion of it, traces to exempt sources. A debtor who deposits $4,000 per month in exempt wages, spends $3,500 on living expenses, and makes no non-exempt deposits can demonstrate that the remaining $500 balance consists entirely of traced wages. The analysis becomes more complicated when multiple income sources enter the same account.

The Commingling Problem

Commingling occurs when exempt and non-exempt funds are deposited into the same account. Section 222.11(3) provides that commingling of earnings with other funds does not by itself defeat the debtor’s ability to trace protected earnings. The same principle applies to other exempt deposits, though the statutory language is specific to wages.

The practical difficulty with commingling is mathematical. When a debtor deposits both exempt wages and non-exempt rental income into the same account, and then makes withdrawals throughout the month, determining which dollars remain in the account requires a tracing method that the court will accept. Florida courts have not adopted a single mandatory tracing method, but two approaches appear most frequently in bankruptcy and garnishment proceedings.

First-in-first-out assumes that the earliest deposits are the first funds withdrawn. Under this method, if the debtor deposited $3,000 in exempt wages on the first of the month and $2,000 in non-exempt rental income on the fifteenth, and then withdrew $3,000 by the end of the month, the remaining $2,000 would be treated as the non-exempt rental income because the earlier exempt deposit was presumed spent first. This method generally disfavors the debtor when exempt deposits precede non-exempt deposits.

Lowest-intermediate-balance identifies the lowest account balance between an exempt deposit and the date of garnishment. The exempt funds can be traced only up to the amount of that lowest intermediate balance, because any drop below the deposit amount means exempt funds were spent. If a debtor deposits $3,000 in exempt wages and the account balance subsequently drops to $1,200 before recovering, only $1,200 of the current balance can be traced to the original exempt deposit. This method is commonly used in trust and fiduciary contexts and has been applied in Florida garnishment disputes.

Neither method works cleanly when multiple exempt and non-exempt deposits overlap throughout the month. The more sources of income flowing through an account, the more complex the tracing exercise becomes. At some point, the debtor’s records and analysis may be insufficient to satisfy the court, and the exemption claim fails.

Segregation as a Tracing Strategy

The most reliable way to preserve the traceability of exempt funds is to prevent commingling entirely by maintaining separate accounts for each category of exempt income.

An account that receives only federal benefit direct deposits is automatically protected under Part 212 for the full balance (up to two months of deposits) without any tracing analysis. An account that receives only head of household wage deposits contains nothing but exempt funds, and the debtor’s claim of exemption requires only proof of head of household status and the direct deposit records. An account that receives only retirement distributions or annuity payments can be traced to a single source with a single set of documents.

The debtor can then maintain a separate operating account for non-exempt income and discretionary spending. Periodic transfers from the exempt account to the operating account should be documented so the debtor can show which withdrawals were made for living expenses.

This structure is not legally required—Florida law expressly provides that commingling does not automatically defeat tracing. But from an evidentiary standpoint, segregation eliminates the mathematical complexity that gives creditors an opening to challenge the exemption. A debtor who maintains clean, single-source accounts shifts the exemption hearing from a contested tracing dispute to a straightforward verification of deposit records.

Multiple Exemptions in One Account

Some debtors receive income from more than one exempt source. A retired head of household might receive Social Security payments, a pension distribution, and part-time wages. Each stream carries its own exemption with its own rules, and all three may be deposited into the same account.

Federal benefits receive automatic two-month protection under Part 212 regardless of what other funds are in the account. The bank’s automated review identifies direct-deposited federal benefits by their ACH coding, not by the account’s overall composition. Wages retain their exempt status for six months under Section 222.11. Retirement distributions are exempt under Section 222.21 without a fixed time limit.

When these streams converge in one account, the debtor claiming all three exemptions must trace each deposit to its specific source and demonstrate that each qualifies independently. The court will not presume that the entire balance is exempt simply because some of the deposits were protected. The debtor must establish the exempt character of each category of funds and show that the remaining balance does not exceed the traceable amount from all exempt sources combined.

If the account also receives non-exempt income, the tracing analysis requires allocating withdrawals among the various deposit categories. The complexity increases with each additional income stream, which reinforces the practical value of maintaining separate accounts.

What Happens at the Exemption Hearing

If the creditor contests the debtor’s claim of exemption, the court schedules a hearing. The debtor bears the burden of proof. The standard is a preponderance of the evidence, meaning the debtor must show that it is more likely than not that the funds in question are exempt.

The hearing typically involves testimony from the debtor regarding their sources of income, dependent support obligations (for head of household claims), and account management practices. The debtor introduces bank statements, pay stubs, benefit letters, and any other records establishing the exempt origin of the deposits. The creditor may cross-examine the debtor and challenge gaps or inconsistencies in the tracing analysis.

Courts are more receptive to exemption claims when the debtor’s records are complete and the account structure is straightforward. A debtor with a single-source account and consistent direct deposit records faces a lower evidentiary burden than a debtor with multiple income streams, irregular deposits, and large unexplained withdrawals.

If the court finds that the funds are exempt, it dissolves the garnishment and orders the bank to release the frozen balance. If the court finds that only a portion of the funds are traceable to exempt sources, it releases the exempt portion and allows the creditor to collect the remainder. If the debtor fails to meet the burden of proof, the creditor receives the full frozen amount.

Limits of Tracing

Tracing preserves exempt status only for funds that remain identifiable. Once exempt funds are spent, transferred, or converted into a non-exempt asset, the protection typically ends. A debtor who withdraws exempt wages and uses them to purchase non-exempt personal property cannot later claim that the property retains the exempt character of the original wages.

The six-month limitation on wage deposits means that any wage income sitting in an account for more than six months has lost its exempt status regardless of whether it can still be traced. Federal benefit protection under Part 212 covers only the two-month lookback period, and any benefit deposits older than two months are not included in the bank’s automatic calculation. Retirement distributions and annuity proceeds have no fixed expiration, but the practical ability to trace them diminishes as account activity accumulates.

Tracing also cannot cure a fraudulent transfer. If a debtor moves non-exempt funds into an account that also contains exempt funds in an effort to shield them from garnishment, the creditor can challenge the transfer and the court can reach the non-exempt portion.