When you default on a secured debt, the lender recovers their collateral by repossessing your vehicle or foreclosing on your home. Unsecured creditors don’t have this option, so they use other means – and some of them might surprise you. Unsecured creditors can and likely will freeze your bank account, but you should usually be given a warning if they do so legally.
Creditors can legally freeze your bank account for unsecured debt, but they usually go through a judgment process where you first receive a warning and can defend yourself. However, there are exceptions for late taxes and child support owed.
Watch for warning signs
With a few exceptions – such as if you owe child support arrears or back taxes – unsecured creditors must first obtain judgments against you before they can take further steps to collect. This means that they must not only sue you, but they must also win their case against you. If they are successful, the creditors can then use the judgment to seize the contents of your bank account.
State laws may vary, but your bank is generally not required to send you written notice of the freeze before it occurs. After all, it would give you the opportunity to thwart the creditor by withdrawing the money. However, you should definitely receive a lawsuit notice, so that you know that collection efforts are underway. If you don’t, the creditor could take shortcuts in a way that is not legal.
The âfreezingâ process
“Freeze” is not the same as “seizure”. When your bank receives a notice that your creditor is foreclosing on your account for what you owe, a mandatory waiting period usually goes into effect. Your account is frozen during this time, but the money is still there – you just can’t access it.
The waiting period can be up to three weeks. This gives you a window of time in which you can take action to protest the actual seizure of your funds. The bank can only freeze your balance up to the amount you owe. If your account balance is $ 6,000 and you owe $ 5,000, including court and other fees, you would still have access to $ 1,000.
Understanding exempt funds
Some funds in your bank account may be exempt from creditors claims. If this is the case, you should speak with a lawyer or take steps during the freeze period to notify the court or the creditor.
Creditors can’t take your Social Security benefits, and they can’t collect certain retirement benefits, disability benefits, and veterans benefits. Also, if the bank account is not in your name only, such as if you are married and jointly hold it with your spouse, a creditor can usually only take half of the funds, assuming the debt is under- this is in your name only and not shared with the person with whom you have the bank account. However, your spouse’s funds might not be exempt in the nine communal property states. These include Wisconsin, Washington, Texas, New Mexico, Nevada, Louisiana, Idaho, California, and Arizona.
Take legal action if necessary
If you weren’t notified that the creditor was suing you, you have an option. Federal and state laws require creditors to give debtors due process, warning them to take them to court so they can defend themselves in the lawsuit.
If this is the case or if you think you never owed the debt in the first place, you can file your own lawsuit in court and ask a judge to overturn the judgment. Without judgment, your creditor cannot take any further action against you. If you are only successful in recovering the lost funds from your account but the judgment is still in effect, the creditor can take on other accounts, place liens on your property, or even garnish your wages.