How to Protect a Bank Account From Creditors
People who have a judgment against them often want to know how to open a bank account that no creditor can touch. Despite the judgment, the debtors need a bank to secure their savings and future income. However, they do not want to put their money in a bank account only to lose it to garnishment or bank account levy.
There are four ways to open a bank account that is protected from creditors: using an exempt bank account, using state laws that don’t allow bank account garnishments, opening an offshore bank account, and maintaining an account with only exempt funds.
First, exempt bank accounts include accounts owed as tenants by entireties (if the debt is only owed by one spouse). Second, some states have laws that prohibit a judgment creditor from garnishing banks within the state entirely, regardless of the source of the funds in the account. Third, an offshore bank account can make collection by most civil creditors very challenging and expensive. And fourth, an account would be protected that includes only exempt funds, such as social security deposits.
- There are two main ways to open a bank account that no creditor touch: using exempt funds and opening in account in a state that prohibts bank account garnishments.
- It is very difficult to hide a bank account from creditors—they can find out where you bank in post-judgment discovery.
- Protecting money in a bank account is not as simple as giving it away or changing the owner of the account.
Opening a Bank Account That No Creditor Can Touch
There are four ways to open a bank account that no creditor can touch:
1. Open an Exempt Bank Account
Some bank accounts may be exempt from garnishment under applicable state laws. For example, in Florida and some other states, bank accounts owned jointly by married couples as tenants by entireties are exempt from garnishment by a judgment creditor of either spouse. The accounts are not exempt from creditors of both spouses, however. Tenants by entireties ownership of bank accounts is governed by 655.79 of the Florida Statutes.
A debtor does not have to reside in Florida to maintain an exempt entireties account at a Florida bank. Florida law exempts entireties accounts in the state regardless of where the owner resides. Beware that there are several legal, technical requirements to open an exempt entireties account at many banks that do not offer an entireties option on the account application. It’s best to find a local Florida bank that expressly provides tenants by entireties accounts and where the entireties designation is expressed on the signature card and monthly statements.
Understand that if a creditor serves a writ of garnishment on a bank where the debtor maintains an exempt tenants by entireties account, the bank will still freeze the account. The debtor will have to hire an attorney to claim the exemption in a court proceeding and have the court order the garnishment dissolved. A bank may not be held liable for retaining money in a garnished account during the time the debtor is attempting to dissolve a garnishment writ through court proceedings.
2. Open a Bank Account in a State Whose Laws Prohibit Garnishments
A judgment debtor can best protect a bank account by using a bank in a state that prohibits garnishment against banks. In that case, the debtor’s money cannot be tied up by a garnishment writ while the debtor litigates exemptions.
If a state’s laws do not permit creditor garnishment of bank accounts, the debtor can always maintain protected cash to pay living expenses and legal bills. The best scenario is where the debtor does not have to reside in the state with protected bank garnishment laws. Such a case allows any debtor to open an account in the protected bank regardless of residency and where the judgment was entered.
Some states, such as South Carolina, Maryland, North Dakota, New York, and New Hampshire, protect a small amount of money in a bank account from judgment creditors. A few states completely prohibit creditor garnishments of bank accounts no matter the amount of money in the account. However, most (but not all) banks in these states accept only customers that live in the state where the bank is located.
3. Open an Offshore Bank Account
An offshore bank account is a bank account located outside the United States. While not technically an exempt account, in practice it is very difficult for a judgment creditor to reach funds sitting in an offshore bank account.
For example, in Florida, a court must have jurisdiction over the offshore bank and over the funds themselves in order to issue a garnishment directed towards the offshore bank. Additionally, there is case law suggesting that a state court cannot compel a judgment debtor in Florida to bring assets located outside of Florida to the state (called a “turnover” order).
4. Open a Wage or Government Benefit Account
Some states, such as Florida, exempt the garnishment of wages of the head of the family. In addition, most federal benefits, such as social security or disability payments, are exempt from garnishment.
Protection of these funds remains when they are deposited into a bank account, but only if the judgment debtor can trace the funds to their exempt source. Tracing is easiest when a bank account contains only funds from the exempt source. In other words, do not mix exempt and non-exempt funds in the same bank account.
Tip: Try to overlap your protection by putting exempt funds in a bank account that is immune to garnishment under state law.
Understanding a Bank Levy
A bank levy is a legal tool to seize funds held in a bank by a judgment debtor. In many states, a bank levy is called a garnishment. A bank levy is, in fact, just one type of garnishment. Garnishments, in general, are the legal procedure a judgment creditor can use to intercept debts a third party owes to the debtor. Banks and other financial institutions are indebted to the customer for the amounts the institutions hold in the debtor’s accounts. State statutes provide procedures for a judgment creditor to obtain a writ of garnishment against the judgment debtor’s financial assets. Bank accounts, money market accounts, safe deposit boxes, promissory notes, and other financial accounts are all subject to creditor garnishment writs.
Generally, a judgment creditor cannot levy or garnish a bank account until the creditor has filed its lawsuit, served the debtor with process, and obtained a judgment. On the other hand, federal agencies have substantially more power to seize a debtor’s assets even before a lawsuit has been completed.
To protect a bank account from creditors, one must understand the legal tools a judgment creditor can use to freeze and take the money in your bank account. In Florida and most other states, the judgment creditor’s legal tool to seize bank accounts is the writ of garnishment.
Upon a bank or stockbroker’s receipt of a writ of garnishment, the bank or stockbroker is required to freeze all accounts where the judgment debtor is owner or co-owner without notice. A debtor may then find himself with no available money to pay living expenses or pay his attorneys.
The levied bank has a time period provided by law to file with the applicable court a response stating what accounts the debtor owns and how much money the garnished bank held in each account on the day the garnishment was served. The debtor then has the opportunity to assert a claim of exemption from garnishment for any of several grounds offered by state law.
Most debtors maintain significant amounts of money in bank accounts or money market accounts at financial institutions. Bank accounts are an attractive collection target for creditors for several reasons:
- They contain liquid assets that immediately can pay the creditor and his attorney.
- Every debtor needs his bank account money to pay his living expenses and attorney fees, and therefore, attacking the debtor’s liquid accounts exerts financial stress on the debtor.
- Obtaining a writ of garnishment against a bank account is a relatively simple legal procedure.
Bank Levy vs. Garnishment
A bank account levy is the legal tool in some states where a judgment creditor seizes a bank account to collect on its judgment. In these states, the law differentiates between a garnishment (used for wages) and a bank account levy (used for money the judgment debtor has in a bank account).
To obtain a bank account levy, a creditor first must petition or motion a Court to enter an order freezing the bank account. Once the court enters the order, the creditor can serve the order onto the bank. The bank will comply with the order and allow the creditor to fully withdraw all funds from the account to satisfy the judgment.
In Florida, bank account levies are called garnishments. Further, Florida law only allows the temporary freezing of the account, allowing the judgment debtor to claim any exemptions before the funds ultimately go to the judgment creditor.
Under Federal collection law, government agencies can levy bank accounts to satisfy government debt such as sanctions, fines, or restitution orders.
Bank Account Garnishment in Florida
In Florida, bank account garnishment is authorized by Chapter 77 of the Florida Statutes. Specifically, under section 77.03, a judgment creditor can request that a court issue a writ of garnishment. Once issued, the creditor serves the bank with the garnishment. Under section 77.06 of Florida law, the bank must freeze all accounts belonging to the debtor, whether the accounts are individual or joint.
It is not up to the bank to determine whether the judgment debtor has any applicable exemptions to garnishment. Instead, Florida bank account garnishment procedures burden the judgment debtor to claim any applicable exemptions.
Florida debtors can protect their bank accounts from garnishment by taking advantage of the state’s exemptions and garnishment procedures. Florida law exempts from creditor collection money from specific sources such as social security, retirement withdrawals, and annuity distributions. Florida courts have consistently held that money from an exempt asset retains its exemption after the exempt money is deposited in the debtor’s bank accounts.
There are also procedural defenses to garnishment. Florida garnishment statutes impose upon creditors many procedural requirements and time deadlines. The garnishment rules are strictly enforced. A garnishment that deviates in any way from the statute’s garnishment rules should be dissolved and the funds released.
The garnishment statutes set out procedures for garnished debtors to assert a claim of exemption or other legal defenses to the garnishment. The debtor is required to challenge the garnishment in a court proceeding and obtain a court order to release garnished money. All the debtor’s garnished funds remain frozen during the time the debtor is challenging the garnishment in court.
A bank may not be held liable for retaining money in a garnished account during the time the debtor is pursuing a defense through court proceedings. However, there is an exception for social security proceeds: a garnished bank is required to release immediately from garnishment all money traceable to the debtor’s social security payments.
Important: A judgment creditor can still try to garnish a bank account even if it only contains exempt funds.
How to Hide Bank Accounts from Creditors
Judgment debtors sometimes want to know how to hide money from creditors. But hiding a bank account from creditors is never an effective asset protection strategy.
Judgment creditors can find where a debtor maintains bank accounts by using post-judgment discovery, or discovery in aid of execution. Post-judgment discovery refers to the creditor collection tools that allow a creditor to find out where the debtor holds assets that are available to satisfy a judgment. A creditor has several methods of forcing a debtor to answer questions under oath about the debtor’s financial accounts, cash on hand, and any other source of money that the debtor has available. These methods prevent a debtor from effectively hiding a bank account from creditors, other than lying under oath. Some creditor discovery tools include:
- oral deposition of the debtor under oath
- written interrogatories (a list of questions the debtor must answer under oath)
- requests to produce accounting statements and other financial documents
- Florida’s standard fact information sheet (a financial statement)
- examination of the debtor’s federal tax returns that show bank interest income
Using a combination of these discovery methods, a creditor may identify all of a debtor’s financial accounts wherever located or identify any person or company owning financial accounts on the debtor’s behalf.
If a debtor answers questions untruthfully or provides misleading or incomplete answers, the debtor may be held liable for contempt of court and criminal perjury. Not only do false and misleading descriptions under oath expose the debtor to unnecessary civil sanctions or criminal liability, but evasive answers will also undermine the debtor’s credibility in subsequent court proceedings.
Proper asset protection planning does not involve hiding assets from creditors. Instead, judgment debtors can take advantage of statutory exemptions and inherent limitations of state garnishment laws to protect their bank deposits even after disclosure.
Example Use of a Protected Bank Account
James is an unmarried Florida resident with an old judgment for an unpaid credit card bill many years ago. The creditor has not tried to collect on its judgment for many years, so James has built up a decent amount of savings in his bank account.
Recently the creditor has scheduled a deposition in aid of execution, so James is worried that the bank will find out where he banks and take his savings. Because he’s not married, he has not taken advantage of tenants by entireties law to protect the bank account. There are no other exemptions to the money in the account.
In this situation, James may be able to protect the funds by depositing them at a bank immune from garnishment under state law. The creditor’s collection tool, should it discover where James keeps his money, is a garnishment. But if the funds are at a bank that the creditor cannot garnish, the money effectively would be protected from the judgment creditor.
Offshore Bank Account Protection
Many attorneys advise clients to protect bank accounts from creditors and garnishments by opening offshore bank accounts that are not subject to U.S. garnishment statutes and writs.
However, U.S. citizens can not easily open offshore accounts in their individual names because of international anti-terrorism rules. Offshore bank accounts can typically only be established through newly formed asset protection entities such as offshore trusts or offshore limited liability companies set up through attorneys.
These offshore arrangements sometimes have disadvantages. Forming offshore entities and offshore banking is complicated and expensive, and the debtor must relinquish control over these entities and their bank accounts to offshore trustees and managers to be effective asset protection. Transfers of funds to offshore entities are subject to attack as fraudulent conveyances under the fraudulent transfer statutes.
In certain circumstances, it may sense for a judgment debtor to use an offshore bank account as part of an overall asset protection plan. Furthermore, some offshore banks have recently allowed U.S. individuals to open an account individually without forming an offshore LLC or offshore trust.
Business Bank Accounts and Garnishment
Using a business bank account can be an effective way for an individual judgment debtor to avoid a bank account garnishment. A person who owns a business can choose to keep more funds in their business rather than distributing the funds to themselves.
If the judgment holder only has a judgment against the individual and not the business, the judgment holder cannot garnish the business bank account directly. Instead, the judgment holder would have to focus its collection efforts on the debtor’s ownership interest in the business.
If the business is a single-member LLC, the judgment creditor can levy (force the sale) of the business to get into the business bank account, so a single-member LLC is not an effective form of asset protection. However, if the business is a multi-member LLC, then the judgment creditor’s exclusive remedy in Florida would be to obtain a charging lien on any distributions from the LLC to the judgment debtor. In this situation, if the LLC does not make any distributions, then the creditor gets nothing.
There are sometimes ways for the judgment debtor to still obtain money sitting in a multi-member LLC bank account without actually having the LLC make a distribution, depending on the language in the LLC operating agreement.
Frequently Asked Questions
What type of bank accounts cannot be garnished?
There are only a few bank accounts in the U.S. that cannot be garnished. Almost every state in the U.S. allows a civil judgment creditor to garnish a bank account belonging to the judgment debtor. The laws of these states apply equally to any type of bank, whether it be a brick and mortar bank or internet bank. A bank that cannot be garnished would have to be solely located in a state that prohibits bank account garnishments. Otherwise, the creditor could serve a garnishment at a bank branch in an unprotected state.
Can a creditor garnish your bank account without notice?
Yes, in most states, a creditor can garnish a judgment debtor’s bank account without notice. If a creditor were required to give a debtor advanced notice that a judgment creditor was going to garnish an account, then the debtor would have the opportunity to empty the account in advance of the garnishment. Garnishments with notice would not be an effective collection tool.
How do creditors find your bank account?
Judgment creditors can find where a debtor maintains bank accounts by using post-judgment discovery, or discovery in aid of execution. Post-judgment discovery refers to the creditor collection tools that allow a creditor to find out where the debtor holds assets that are available to satisfy a judgment. These tools include inspection of the debtor’s tax returns, bank statements, financial records, and the debtor’s testimony under oath about his assets. There also are services that search national banking records to discover a debtor’s banking history.
Can an LLC bank account be garnished?
An LLC bank account can be garnished if there is a judgment against the LLC. However, if there is a judgment against the LLC owner, a creditor cannot directly garnish the bank account of the owner’s LLC. A creditor can obtain a charging lien against the LLC, prohibiting the LLC from distributing money from the LLC account to a debtor member.
Can a creditor take all the money in your bank account?
In most situations, a creditor can take all of a debtor’s money in the debtor’s bank account, if the money is not otherwise exempt, up to the amount of the judgment. However, money in the debtor’s garnished bank account that was deposited by a non-debtor who is co-owner of a joint bank account may be released from the garnishment freeze.
The non-debtor has to go to court to assert ownership of his money in the joint bank account. For example, suppose a judgment debtor shares title to a bank account with an elderly parent. In that case, the judgment debtor may defeat the garnishment by asserting that the funds do not belong to him despite his name appearing on the account title.
If your bank account is levied, can you open a new account?
A bank account levy, or garnishment, is a proceeding against a bank to turn over to the creditor any amount the bank owes to the debtor (the account balance). However, the bank account garnishment is not an injunction on the debtor’s personal banking. In other words, the debtor may open up additional accounts, whether at the same bank or any other bank.
Can a debt collector garnish a joint bank account?
In general, a debt collector can garnish the debtor’s interest in a joint bank account. The creditor has this ability even if the joint owner is not liable for the judgment. In addition, if the money in the account is derived solely from the non-debtor joint owner, then the debtor whose name appears in the account title could prove that they have only bare legal title to the money and no equitable rights subject to garnishment. As stated above, joint accounts owned by married persons are exempt from garnishment directed at either spouse individually under the laws of Florida and a few other states.
Can a savings account be garnished?
Yes, a savings account can be garnished. A bank account garnishment makes no distinction between checking accounts, savings accounts, money-market accounts, online savings accounts, or CDs. It applies to all varieties of financial accounts.
How often can a creditor levy a bank account?
A creditor can repeatedly levy, or garnish, a bank during the life of a judgment. While the creditor cannot harass a judgment debtor, repeated levies or garnishments of bank accounts alone do not constitute harassment, especially if the funds in the bank account are generally not exempt.
Protecting a bank account from creditor levy requires understanding the legal tools a creditor will likely use to freeze a debtor’s bank account and take the money in the account.
How long can your bank account be frozen for?
In a garnishment, a bank account is frozen until the garnishment process is fully resolved, which takes 1-4 months. There are many reasons why a debtor may claim exemption from garnishment of money in a bank account, including, for example, accounts holding retirement funds, social security, or entireties accounts in the case of a married debtor.
Most states provide that money from an exempt asset retains its exemption after it is deposited in the debtor’s bank accounts. The debtor must claim and prove their exemptions in court. The legal process typically lasts at least a month, but could go on for two months or longer if the creditor fights the claim of exemption.
How does a levy on a bank account work?
In a bank account levy, a judgment creditor first gets a court to issue a writ of garnishment based on the amount of the judgment. A writ of garnishment is directed towards a particular bank. Then, the creditor serves the bank with the writ of garnishment. A bank that has been served a writ of garnishment must, with few exceptions, freeze all accounts belonging to the judgment debtor, even joint accounts.
In Florida, the creditor must follow strict procedures when garnishing a debtor’s account. One of these procedures involves mailing the debtor a copy of the garnishment documentation, including a Claim of Exemption form. If the debtor files the claim of exemption, the debtor may be entitled to a hearing on the claim and could try to have the garnishment dissolved.
How long does it take to garnish a bank account?
Typically 1-2 weeks. Once a judgment creditor files a motion for a writ of garnishment, the court will typically issue the writ within a few days. Some courts/judges take longer than others. Once issued, all a creditor has to do is serve the bank garnishment documents, which does not take long.
Can debt collectors see your bank account balance?
A debt collection can see your bank account balance using post-judgment discovery. A judgment creditor has many tools to discover the precise nature and amounts of your assets. While a creditor cannot easily look up your bank account balance at will, the creditor can serve the bank with a writ of garnishment without much expense.
The bank in response typically must freeze the account and file a response stating the exact balance in any bank account held for the judgment debtor.
In addition, the judgment creditor can subpoena a bank for bank statements or other records, which would reveal a typical balance in the account.