If you have a bank account that's FDIC-insured or a credit union account that's NCUA-insured, you can rest assured that your money is safe. However, there are specific circumstances under which a bank can freeze and seize your funds. While most require a court order, one does not.
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Court order required
Generally, your bank requires a court order directing it to seize your account. Here are the most common reasons a court order might be granted.
Judgment lien
Imagine you've financed a car through a dealership and have missed payments. The dealership takes you to court and obtains a judgment against you. The dealership can then request a lien on your bank account, allowing your bank to freeze or withdraw funds. It's only when your bank has that court order in hand that it can proceed.
Tax levy
State and federal tax authorities can issue a tax levy against your bank account if you have unpaid taxes. This move enables these authorities to receive funds directly from your account.
Wage garnishment
In some cases, a court will order your bank to garnish funds from your account to cover unpaid child support, alimony, or student loans. Again, the bank can't legally garnish your wages on behalf of a third party without a court order.
Divorce
If you're in the middle of a divorce and have considerable assets, your soon-to-be ex may petition the court to freeze any accounts you share. If the court agrees that you may move money, it could grant the order.
No court order required
Let's say you have a car loan through your bank or credit union, and it's been a couple of months since you made a payment. Chances are, you don't remember doing it, but when you opened a bank account, you signed an agreement granting the bank the "right of offset," also known as the "right of setoff." The right of offset gives your financial institution the right to deduct funds from your account to cover a missed payment, provided it holds that account.
The bank doesn't have to inform you in advance, a fact that can lead to bounced checks, a depleted money market account (MMA), or interest penalties on a certificate of deposit (CD), depending on which account the money is drawn from.
Finally, your bank has a legal obligation to freeze your account if it suspects fraud or any other illegal activity. Once an investigation has been run and it's clear there is no illegal activity, your account will be unfrozen.
Exceptions
The right of offset doesn't necessarily apply to every loan type or financial institution. For example, if you have a credit card issued through your bank, the bank can't use the right of offset to recover late payments. However, depending on the agreement you signed, a credit union may have the right to seize money to pay a credit card debt. It's this kind of detail that makes it so important to read any agreement carefully before signing.
In addition, certain funds are protected from right of offset, especially if they're directly deposited into your account. Here are the types of income that are protected:
- Social Security
- Social Security Disability (SSDI) benefits
- Veterans Administration (VA) benefits
- Pension payments
- Public assistance benefits
- Retirement account distributions
- Child support and alimony payments
- Unemployment insurance benefits
- Workers compensation benefits
An issue may arise if your bank is unsure of the source of your funds. For example, if the money in your account is the result of pension payments, you'll need to contact your bank and inform them. The best way to prevent any seizure is to pay your bills as agreed. If you have a problem paying, contact your creditor and let them know. Most creditors are happy to work with you if they know you're acting in good faith.
