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Frozen bank account: How it happens and what to do next
Bank account freezes usually happen when you have unpaid credit cards, medical debt, or unsecured loans, and the creditor or collection agency takes legal action to collect the money.
If your bank account is frozen, you'll likely have some funds taken out to cover your debt, but there are ways to potentially reduce your losses if you act fast.
What does it mean when your bank account is frozen?
If your bank account is frozen, one explanation could be that the bank received legal orders to withdraw money and turn it over to your creditor. If this is the reason for the freeze, the account will likely remain frozen for roughly 21 days while the court determines how much money can be taken out.
In order to freeze your account, a creditor has to successfully sue you for unpaid debt first. When they win the right to a "levy" or "garnishment," the bank has to freeze all the funds in the account. Neither you nor anyone on a joint bank account will have access during that time. Restricted activities during a bank account freeze include:
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Withdrawals
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Transfers
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Debit card purchases
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Payments by check or autopay
Can a creditor take all of the money from your bank account?
If your bank account is frozen, you'll temporarily lose access to all of the funds in the account. Then, the court will determine how much money can be seized. However, there are limits to what a creditor can take.
The creditor can only seize the amount you owe them, plus allowable fees, minus all legally exempt money in the account. What qualifies as exempt depends on the laws in your state, but usually includes the following:
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Federal benefits directly deposited to your account within the past two months
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A set amount of earned income ranging from $0 to $3,600, which can be kept for basic necessities
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State benefits such as unemployment
If all of the funds in your bank account are exempt, the creditor can't take any money, even if they have legal permission to garnish the account. Note, however, that the same rules do not apply to student loan debt and overdue child support.
Bank account freeze rules
Some of the rules around bank freezes vary by state, but these are the common guidelines the creditor must follow to freeze your account and remove funds:
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Notice of a lawsuit: The creditor and court must send you notice of the creditor's plans to sue you for the debt.
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Legal judgment: If the creditor wins the lawsuit (which is a common outcome), they have legal permission to request a freeze on your bank account(s).
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Notice of the freeze: The creditor may have to send you a letter or notice informing you of the impending freeze.
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Holding period: The bank account goes into a holding period, during which all of the funds may be frozen while the court determines what the creditor can remove.
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Opportunity to respond: During the holding period, which is usually 21 days, you may be able to negotiate a settlement with the creditor and/or you may need to file an Exemption Claim to inform the court of your exempt funds.
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Missed payments: Automatic payments and checks written from your account will not clear. As a result, you might incur fees from your bank and from the payee.
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Seizure of funds: Money is removed from your account to pay the creditor.
Can you stop a creditor from freezing your bank account?
If you find out a creditor intends to sue you, there are ways to prevent a bank account freeze. Most importantly, don't ignore the lawsuit. Failure to respond by the deadline outlined in the summons can result in losing your case by default and increasing the amount you owe. Many consumers follow this path and are shocked to later discover a frozen bank account.
First, contact a lawyer with experience in consumer law or debt collections. They may advise you on how to defend yourself in court or offer guidance on filing for bankruptcy, which will halt collection actions.
If you don't have a strong legal defense, the lawyer may suggest contacting the creditor to offer payment. By sending the creditor a lump-sum settlement or setting up a partial payment arrangement, you could avoid going to court and having your account frozen. Just be sure to get the details of the payment arrangement in writing before you send any money.
Protect your benefits
For anyone who receives federal benefits, you'll want to take extra steps to protect your money. If a creditor intends to sue you, consider setting up a separate bank account where only your benefits will be deposited.
Alternatively, you might arrange to load the money to a Direct Express prepaid debit card. These prepaid cards are available through a partnership with the U.S. Department of the Treasury, and you can use them to pay bills, withdraw cash, and even earn cash back.
How to deal with a frozen bank account
Once your bank account is frozen, you'll need to act quickly to limit the damage. You can still try working out a payment arrangement with the creditor to prevent them from seizing the money. You'll also want to read the notices from your bank and/or creditor to familiarize yourself with your rights and your timeline for responding.
If you have exempt federal or state benefits, contact the bank to inform them of the exemption and ask for the freeze to be immediately lifted. If they refuse to give you access to your exempt funds, contact a lawyer and prepare to take legal action.
Then, make plans to reroute your upcoming transactions. For incoming funds, arrange to receive them by check or have the cash deposited elsewhere. For outgoing funds, cancel any scheduled payments. Unfortunately, you may need to inform some creditors or other agencies that you won't be able to make your upcoming payment on time.
