So, you have some unpaid debt and your creditors are trying to collect what you owe them. Now, you find your bank account frozen because of a court judgment, and you wonder, “How long can a creditor freeze my bank account?”
A bank account may remain frozen for no specific period or up until you have satisfied the condition that’s been set to lift the freeze. Typically, though, it takes around three weeks which is meant to give you sufficient time to rectify your situation with the creditor. Creditors and collection agencies can sue you for unpaid debt until the statute of limitations has expired, which range from three to 15 years, depending on the type of debt and your location.
What is a Frozen Bank Account?
A frozen bank account means you can’t make money transfers, withdrawals, scheduled payments, or checks payments. Banks freeze your account once they receive a garnishment order.
You can still make deposits to your bank account even if it is frozen. However, bank account freeze rules prohibit you from making any debit transactions. Account freezes are temporary, typically three weeks, but you have to meet the demands of the creditor if you wish to unfreeze it.
Since scheduled payments won’t go through with a frozen bank account, you can expect non-sufficient funds charges even when you have balance in your account. Banks can deduct these fees from your account, which can result in a negative balance. Consequently, you may have to pay fines and interest to cover the overdraft.
There are no explicit bank account freeze laws, but there are general guidelines that you can refer to in relation to frozen accounts. These include the following, which we’ll discuss more in succeeding sections:
Why is your Bank Account Frozen?
A couple of circumstances can result in frozen bank accounts:
1. Unpaid Debts to Creditors
One of the most common causes of a frozen bank account is unpaid debt. If you failed to pay your loans, your creditor can get a court judgment to freeze your bank account. A creditor cannot request to suspend your bank account if they don’t have a court judgment. However, there’s an exception to this bank account freeze rule. A judgment is not needed if you took out a loan in the same institution where you opened a bank account.
2. Unpaid Debts to the Government
You may also find your bank account frozen if you have unpaid debts, such as student loans, taxes to the government, or even unpaid child support payments. This could lead to wage garnishment without a court judgment.
3. Illegal Activities
Banks may also freeze your account if they believe it’s been involved in suspicious or illegal activities, such as fraud, money laundering, and possible terrorist financing.
Will Your Bank or Judgment Creditor Inform You Before Your Account is Frozen?
In most cases, you won’t receive any notice prior to freezing your account. You may hear about the account freeze from the bank, but your account is already frozen by the time you learned about it. Likewise, the judgment creditor may or may not inform you before the account freeze. That’s to prevent you from withdrawing your money and emptying your account before they freeze it.
Even so, your creditor must tell you that it has sued you and if it managed to get a judgment against you.
How Do You Unfreeze Your Bank Account?
Get in touch with your bank to know why your bank account was frozen. Unless it was because of a court judgment due to unpaid debt, talk to your bank and explain why your account shouldn’t be frozen. Provide the necessary documents to support your claim.
If it’s because of a court judgment, but you weren’t notified and you can prove that you were never contacted about the legal action being taken against you, you could ask the court to vacate the judgment (make it null and void). However, if it’s because of unpaid debt, you have to talk to the creditor involved and pay your debt to lift the account freeze.
Can Your Creditor Take Money From Your Frozen Bank Account?
Yes, creditors can take money from your frozen bank account to settle your unpaid debt through a process called garnishment, provided that they obtained a court judgment. Once a creditor gets a court order, it can require your employer to take out a portion of your wage from your paycheck to settle your debt.
Your bank has to inform you about the account freeze. Additionally, the notice must include the procedures on how to claim exemptions and how to get your money released. If your account contains exempt funds, you have to tell the court right away. A judge will decide whether to turn over your money to the creditor or have the exempt funds released to you.
Under Title III of the Consumer Credit Protection Act, the garnishment amount should be the lower of the two:
- 25% of your weekly disposable income.
- Any amount more than 30 times the weekly minimum wage
Title III protections also prevent employers from firing you because you’re being garnished for a debt. However, this protection isn’t applicable if the garnishment is for more than one debt.
What if Your Frozen Bank Account Contains Exempt Funds?
Federal benefits are exempt funds, which means creditors cannot garnish them. This rule only applies if these benefits are directly deposited into your bank account. You can inform your bank about the exempt funds, but if they refuse to release your money, you may have to go to court to prove your case. Keep in mind that these exemptions vary by state.
Other protected wages include your commissions, vacation pay, retirement payments, pension, and sick pay. However, your federal benefits can be garnished to pay off government debts, student loans, alimony, and child support.
Furthermore, if you’re receiving the benefits by check and then you deposit it into your bank account, your bank cannot automatically protect your two months’ worth of benefits. Your freeze will apply to your entire bank account and you have to go to court to prove that it contains exempt funds. Don’t forget to provide the bank deposit slips and other documents to support your claim.
Once the judge issues an order declaring that your bank account contains exempt funds, the bank has to lift the account freeze on your exempt funds. You should also ask the bank to refund or waive non-sufficient funds and other fines that you may have incurred because of the freeze.
How Long Does Your Creditor Have to Wait Before Taking Out Money From Your Account?
When we say account freeze, it means your money is still in your bank account but you can’t access it. How long can your bank account be frozen for? Once your creditor informs your bank that it will garnish your account, your bank account will be frozen for three weeks and you can use this time to take remedial actions. You can file a motion against the fund seizure. You may also get in touch with your creditor and try to negotiate a new payment plan.
Will a Frozen Bank Account Affect Your Credit Score?
No, a frozen bank account doesn’t affect your credit score directly because your bank account details don’t appear on your credit reports. What could hurt your credit score is the judgment for wage garnishment or your defaulted credit accounts.
In 2017, the three national credit bureaus, Experian, TransUnion, and Equifax, have agreed to remove from consumers’ records any civil judgment and tax liens. So, other than accounts being defaulted, a wage garnishment order from the court shouldn’t be on your credit history. You must check your record by getting one free copy from these bureaus and file a dispute if you find judgment orders in your credit history.
How to Avoid a Frozen Bank Account?
1. Pay Your Debt
Always pay your debt if you don’t want debt collectors to hound you for the money you owe. If you find yourself short of cash, talk to your creditors right away and ask if you can work out a new payment plan.
2. Choose Direct Deposit for Government Assistance Payments
According to NOLO, banks can’t freeze the last two months of the government assistance payments made through direct deposits. But this doesn’t apply to the same assistance received through checks and then deposited into your bank account.
3. Familiarize Yourself with Exempt and Non-Exempt Funds
There are laws that protect your federal benefits from garnishment after an account freeze. These include Social Security benefits, SSI benefits, Veterans’ benefits, and more. Refer to the Federal Trade Commission for the complete list of federal benefits that belong to the exempt funds.
4. Don’t Keep a Savings or Checking Account in a Bank That You Owe Money To
If you have a loan from a bank where you have a savings or checking account, the financial institution can freeze your account and take out the money owed. Banks don’t need to get a court judgment in this situation. The bank has the right to freeze and take out the money you owe from your savings or checking account without any court judgment if you have an existing unpaid debt with them. This is written under the Common Law Right of Setoff.
Conclusion
Nobody wants to have a frozen bank account because of unpaid debt, but it can happen. How long can a creditor freeze your bank accounts? Your bank account may remain suspended for 3 weeks initially or a longer time until you meet the conditions of the creditors. If you don’t want to suffer the negative consequences, the first thing you have to do is pay your debt. If for some reason you’re unable to do so and it has resulted in an account freeze, you should know what your rights are and what you can do to claim exempt funds.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
