Are you wondering how to open a bank account that no creditor can touch? Is this even possible? You probably want to know whether this is doable if you experienced a bank levy or wage garnishment before and you don’t want it to happen again in the future in case you fall into debt again. Or perhaps you’ve heard of horror stories from people whose bank accounts were frozen and you want to avoid that from happening to you, too.
While there’s really no 100% guarantee that creditors cannot discover and seize your money, there are a number of options available that could help you protect your funds.
Opening a Bank Account That Creditors Cannot Touch
If you’re trying to find out how to open a bank account that no creditor can touch, you can consider these options below:
1. Open a Bank Account Solely for Government Benefits
This option is available to people who are receiving funds that are exempt from garnishment. By law, creditors cannot access these funds within a certain lookback period, which is usually 2 months.
Some examples of exempt funds are:
- Social Security Benefits
- Unemployment Benefits
- Retirement Benefits
- Child Support / Spousal Payments
- Veterans’ Benefits
- Life Insurance Benefits
- Disability Benefits
For these funds to be considered exempt, they have to be directly deposited into your bank account. If you withdraw them and move them to another bank account or you deposited the funds yourself, they are not exempt anymore and you would have the burden of proof to prove that those funds indeed came from exempt sources.
While the bank is legally required to keep these exempt funds available to you even with a bank levy, you do not want to run the risk of having a debt collector take your Social Security payments or your bank freezing child support payments. To avoid these errors, it’s best to open a separate bank account that will only hold directly deposited exempt funds.
2. Open a Bank Account in a State with 100% Wage Garnishment Protection and Favorable Bank Levy Laws.
In a bank levy, a judgement creditor can request the bank to freeze your bank account and take all the funds from your account, unless there are exempt funds. In a wage garnishment, the creditor takes a portion of your monthly salary until the debt is satisfied.
States have different bank levy laws. There are states with favorable bank levy laws, meaning a portion of your funds can be protected from being totally levied even if they do not fall under the classification of exempt funds.
For example, in New York, banks cannot restrain the first $1,716 in any bank account not receiving directly deposited statutorily exempt payments; while this amount goes up to $2,500 if the account is receiving exempt payments.
Other states with a high amount of exempt funds from a bank levy are South Carolina ($5,000), Maryland ($6,000), North Dakota ($7,500), and New Hampshire ($8,000). While some states including Florida, Hawaii, and Texas do not offer any additional protection when it comes to a bank levy, unless the source of the funds are all legally exempt.
When it comes to wage garnishment, most states protect 75% of your income. This means that the creditor can only take 25% maximum of what you’re earning. However, there are states that protect 100% of your paycheck from garnishment including North Carolina, South Carolina, Florida, Texas, and Pennsylvania.
Opening a bank account in a state with favorable bank levy and wage garnishment protection laws might help you if your bank account was previously frozen and you’re looking to open a new bank account. This is because a creditor can levy your account more than once until the debt is satisfied.
As mentioned, the laws differ from state to state so the first step is to check the laws in your state of residence. If your state does not have favorable laws, look for a local bank in a favorable state. It should not be a branch of your existing bank where your account was frozen previously but a new bank altogether.
Of course, even if you open a bank account in South Carolina, for instance, if you have funds above the $5,000 exempt funds, the money that is over the limit will not be protected from a bank levy. If you open a bank account in Texas, there is 100% wage garnishment protection but there is no protection when it comes to non-exempt funds during a bank levy.
Check the requirements as some banks may not allow you to open an account if you are not a resident of that state. You can usually check online regarding the process of opening a new bank account or alternatively, call the customer service phone number of the bank to get precise information.
3. Open an LLC Business Bank Account
This option is available if you have a business or planning to start a business. Most solo entrepreneurs use their personal bank accounts even for business purposes because they think it’s just more convenient to maintain a single bank account.
However, if you have funds in your personal bank account that are related to your business, you don’t want these funds to be levied or frozen because of your personal debts.
The advantage of opening a business bank account for a Limited Liability Company (LLC) is that the courts will consider the company a separate entity from the individual owner. This means that if your debt is personal in nature, the creditors will not be able to garnish the LLC bank account.
You must, however, be careful to keep your personal funds and business funds separate, meaning avoid commingling funds because this could deny you the limited liability protection of the LLC. When this happens, creditors may be able to ask the court to seize your business bank account funds.
If you are just in the process of opening a new business, however small it is, consider opening a limited liability company. State filings fees range from $40 to $500. Once your LLC is established, contact a bank to check what the requirements are to open an LLC business bank account.
4. Open an Offshore Bank Account Through a Foreign LLC and Trust
This process is not as straightforward as just opening an offshore bank account under your name because that way, the creditors can still access these funds through a court judgement and the judge can order you to pay back your creditors with these funds.
Many asset protection companies recommend opening an offshore trust combined with an LLC, which will then own the LLC bank account. These tools supposedly make it more difficult for creditors to access the money.
To do this process legally and accurately, you would have to consult with credible lawyers and financial planners, which will obviously cost you money. If you’re only trying to protect a couple of thousands, going through this process may not be worth the hassle.
This is often recommended to people with a lot of money who want to diversify their assets and protect their funds in the far-off future, rather than immediately. If you already have a judgement against you and you’re planning to move a large amount of money offshore to avoid paying creditors, this may be considered fraudulent conveyance.
Is it Illegal to Move Money Out of My Bank Account to Avoid Creditors from Taking it?
If you move a large amount of money out of your bank account for the sole purpose of avoiding creditors from taking your money, this can be considered as fraudulent. This is referred to as Fraudulent Conveyance which is the intentional transfer or sale of your assets to avoid paying creditors. There are different ways that you can be guilty of fraudulent conveyance.
Here are some examples of situations that could be deemed as fraudulent:
- You transferred all your money or a substantial amount to another person like your spouse, family member, or business colleague to avoid paying a judgement
- You transferred a large sum of money to an offshore account shortly before filing for bankruptcy.
- You sold your assets for less than the reasonably equivalent value, like selling a brand new $30,000 car for only $3,000 to your sibling, then continuing to use that car even after the supposed sale.
You may be surprised to know that the look back period for fraudulent conveyance is usually one year so if you’re planning to hide your money intentionally while knowing that there is a potential or current claim from a creditor, you could be committing something illegal.
However, if you’re just withdrawing reasonable amounts over a period of time to pay your bills or maintain your living expenses, then this will likely not be seen as fraudulent compared to withdrawing a large individual sum at one go. If you sell your car or your property at a reasonable market rate to a third-party not associated with you, then this should not be seen as fraudulent as long as it was a fair exchange. The creditors have to prove that the transfer of assets was an intentional move to avoid payment for it to be considered as fraudulent.
If my Bank Account is Levied, Can I Open a New Account?
Yes. As long as you meet the requirements of the bank where you want to open the account, there should not be a problem about opening a new bank account. However, just because it’s a new bank account does not guarantee that creditors will not find it, ask the courts for you to disclose your new bank information, and levy it again.
Can I Hide my New Bank Account from Creditors?
Most people who ask the question “How do I hide my bank account from creditors?” are those who already experienced a bank levy in the past or are facing a debt collection lawsuit.
If creditors won a judgement against you, the reality is, you can’t really hide your bank account from them because they can obtain a court order for you to declare your bank accounts and financial information under oath. Yes, under oath! This means that you have to truthfully supply this information because if you lie, you then commit perjury.
Keep in mind, however, that the judgement creditor, has to win the lawsuit against you to have access to your bank account.
For example, if you receive summons for credit card debt, it’s important that you don’t ignore this lawsuit because ignoring it will likely result in the creditor getting a default judgment, meaning the creditor will win the lawsuit whether the claim was accurate or not.
Alternative to Opening a Bank Account Creditors Can’t Touch
Opening a bank account that a creditor cannot touch is not always an easy process. Unless you declare bankruptcy and legally discharge your debt, debt collectors can continue to hound you endlessly. However, opening a new bank account is not your only option to manage your money.
If your bank account was already levied before, you obviously don’t want to use the same account to deposit more funds. Since opening a new account cannot absolutely protect you from being levied again, it’s much better to keep the extra money you save or your wages out of a bank account.
You can always use cash but if you’re not comfortable carrying around cash with you or keeping cash in your house, you can use a prepaid card as a way to keep your money and pay for your expenses. There are now re-loadable prepaid cards that you can top up and some cards even allow direct deposits of paychecks.
While it is not impossible for creditors to track prepaid cards, it’s much more challenging to keep track of these cards especially if you are using a disposable prepaid gift card.
Protecting Your Bank Account from Creditors
To protect your bank account from a bank levy, you have to avoid being sued or having a default judgement against you. If you receive summons for a debt collection lawsuit, don’t ignore it. You have the option to answer the summons and contest it in court, which will give you a better negotiation power to settle the debt. Just ignoring it will increase the likelihood of the creditors winning the lawsuit and give them the legal right to levy your bank account.
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.
