How do you protect your bank account from creditors? If you have a judgment pending or a costly lawsuit ahead, your bank account may be at risk. Your account could be frozen, levied, or garnished, taking control over your money out of your hands. What can you do to prepare for this possibility? What can you do once it’s already happening?
In this article, we’ll explore how creditors can threaten your bank account, how to protect your bank account from a judgment, and the next steps you should take.
Threat 1: A Frozen Bank Account
When you protect your bank account, you protect liquid assets. When creditors come after your bank account, a common action is to freeze those liquid assets to keep you from moving them; thus, a frozen bank account. But what does that mean exactly? Investopedia defines a frozen account as an account through which no transaction can be made. These freezes usually come from a court order and, in some cases, are the bank imposes the freeze, itself. Often, the freeze comes as a result of money owed to another individual or business, or a debt to the Internal Revenue Service (IRS). These are not necessarily permanent measures. They usually, however, usually require the courts or the account holder to take certain actions before they can be lifted. Often, these actions include a payoff of the debt. (Our company policy is to not knowingly protect assets from a government agency.)
On can often continue to make deposits and transfers into a frozen account; but one cannot generally make purchases, withdrawals, or transfers out. How long can a creditor freeze your bank account? There is no set amount of time, and usually, the freeze is only lifted when one has met the conditions of the freeze. A creditor can choose to freeze the account for up to twice the amount owed. Financial institutions must freeze accounts immediately after they receive a court order to do so. A bank can temporarily freeze an account in certain circumstances without a judgement. The bank does not need to inform the account holder of the freeze.
All told, a frozen bank account is something bad that you really want to avoid. After the account freeze has begun, your choices include fighting the freeze or meeting the terms set by the creditor. With the right protection ahead of time, however, you can avoid the hassle of a frozen account entirely.
Threat 2: A Bank Levy or Garnishment
In addition to simply freezing your account, creditors can take it a step further by requesting a bank levy or garnishment. As The Balance explains, a bank levy is a legal action that permits creditors to remove funds from your bank account. After freezing your account, the bank must send money to creditors in order to satisfy your debt. A garnishment, on the other hand, is a collection tool in which a creditor instructs your employer to take a chunk of your wages directly from your paycheck. They employer then sends that money to the creditor to apply to the debt.
Although creditors and banks are not required to alert you when a levy or garnishment is in progress, it only happens after a legal judgement has been made against you. Creditors have to show proof of this when requesting a levy or garnishment. The IRS and the Department of Education are especially likely to use these tools, but private creditors can also do so. Often, a creditor uses a bank levy or garnishment they haven’t been successful in other ways to get the money.
Can a creditor take all the money in your bank account? Yes, they can. When a bank levy or garnishment occurs, you can dispute it. Possible approaches to disputing these actions include identity theft, errors, lack of notification of a legal judgement, bankruptcy, and negotiation. There might also be some money that creditors can’t touch, which we will discuss later in this article.
First Step: An Offshore Bank Account
If you’re trying to learn how to open a bank account that no creditor can touch, your best bet is to start with an offshore bank account. This is especially true when you hold your offshore account inside of an offshore asset protection trust. We usually combine a trust with an LLC where the trust owns the LLC. The LLC holds the bank account. You are the LLC manager while the waters are calm, the trustee (e.g. our offshore law firm) steps when they are not. If you have an offshore account without these tools, a judge can simply order you to bring the funds back. These tools can tie your local judge’s hands. The We will talk about this later.
According to Global Finance Magazine’s annual rankings, U.S. banks are pretty far down the list of the safest banks worldwide to store and protect your money. Plus, if you might have a creditor attack in the future, the bank must comply. As Nomad Capitalist explains, using an offshore bank account is the best way to make your assets inaccessible to creditors.
Offshore bank accounts allow you to legally bank anywhere in the world. Diversifying your assets geographically has a lot of benefits. Money in one of these accounts is much harder for a creditor to get to. Offshore bank accounts adhere to the law of the country they reside in, which means that when a creditor comes knocking, they don’t have to comply. Other countries – such as Switzerland, Germany, and the Netherlands – also have banks with higher safety ratings than the U.S.
Other Offshore Company Benefits
There are benefits to an offshore bank account beyond simply protecting your money. Many of them have higher interest rates, growing your money faster. By diversifying your currency, you can protect the value of your assets. Banking offshore allows you to explore new opportunities and different investments. There is also a great amount of privacy that comes with banking in the right offshore country. In combination with an LLC (limited liability company) and properly structured trust, an offshore bank account can be part of a strong asset protection plan.
Best Protection: Asset Protection Trust
Another option to protect your bank account from creditors is setting up a trust. There are a lot of different kinds of trusts out there, with the main categories being revocable and irrevocable. A revocable living trust provides little to no asset protection, Legalzoom explains. The settlor, or person who creates the trust, retains control of the trust’s assets. Since the assets are still tied to the original owner, courts can order payouts from it to settle a claim.
An irrevocable trust, on the other hand, separates the assets from their owner. The trust owns the assets instead and the trustee is responsible for managing it. If a creditor makes a claim against you, money in an irrevocable asset protection trust will likely be safe because it won’t be counted as yours. Many people think that an irrevocable trust allows no changes or alterations once you set it up. However, with a properly structured trust, you can request that the trustee make certain changes that do not put trust assets at risk.
Types of Irrevocable Trusts
There are three main types of irrevocable trusts that are used for asset protection: domestic, foreign, and Medicaid. Each of these three options have different benefits. For example, domestic trusts are cheaper to create, but domestic courts often penetrate them. Foreign trusts cost a bit more but provide substantially better privacy and protection.
Not all states offer domestic asset protection trusts. In addition, since they are newer in the U.S., the laws around them are constantly changing. Many offshore trusts have a well-established legal past that are safe from U.S. judgements. A Medicaid trust can help you remain eligible for Medicaid when you need it by reducing the assets in your name. Call us to get more information and find out which trust is right for you to protect your bank account. You can talk to one of our experienced consultants by calling one of the numbers above or completing our free consultation form on this page.
Take Advantage of Exemptions
Although it cannot replace a good asset protection plan, there are some beneficial exemptions to take advantage of. As NOLO explains, these exemptions may allow you to keep some or all of your money in the event of a frozen account or seizure.
On the federal side of things, using direct deposit for government benefits provides more protection. A creditor cannot automatically freeze deposits to these accounts with these electronic deposits if the creditor tries to levy it. If you face an account freeze or seizure, you will be able to keep two months of benefits. A creditor may get the rest. The following benefits do not lose their exempt status, even after the checks are cashed:
- Social Security and Supplemental Security Income (SSI)
- Federal, civil service, and railroad retirement benefits
- Veterans’ benefits
- Student loan disbursements and aid
- FEMA aid
State laws vary widely, but they may provide more protection than federal laws. Many states exempt a percentage of an individual’s income, usually around 25%. General exemptions in many states can be applied to any property of your choosing. Often called “wild card” exemptions, these exemptions usually have a dollar amount between $500 and $10,000. Other state benefits that may be exempt include:
- Public assistance
- Workers compensation
- State government retirement benefits
- Disability benefits
- Pension and retirement benefits (ERISA and non-ERISA)
- Child and spousal support
- Certain types of insurance benefits
Courts may ignore both state and federal exemptions, however, if you owe child or spousal support. Student loans, federal tax debt, and overdraft fees might also override any exemptions.
Protect Your Bank Account and Fight Back
The best form of defense to protect your bank account against creditors is good preparation. Once you receive a judgement, there are still a few things you can do to protect yourself. As Pocket Sense explains, you should contest the lawsuit or claim as early as possible. Deciding not to fight back at all means that the judge will likely rule in favor of the creditor, even if you might have had a valid defense. Make sure you file an exemption notice if some of your money is exempt.
Whether you’re planning for the future or facing an upcoming claim, make sure you’re getting the best protection possible by contacting our financial experts. With our experience, we can help you navigate the complexities of asset protection and ensure that you have the best protection available. Use the phone number or contact form on this page for more information.