Businesses and individuals, sometimes due to no fault of theirs, get to lag behind on their taxes and fees. When this happens, the IRS and others need to get their money and this can result in the garnishment of their bank account.
Bank account garnishment is a situation where a debt collector has successfully sued to have money taken out of your bank account to satisfy some debts you accrued. This happens if you haven’t repaid debts such as a medical bill or unpaid taxes.
Most garnishments of bank accounts also known as bank levies, start with a lawsuit against you. In that lawsuit, a court determines that you were responsible to pay a debt and then grants the party which sued you, the creditor, the right to collect that money. Judgment creditors most commonly collect what’s owed by garnishing wages, placing liens on real property like your home, and levying bank accounts.
Your bank isn’t required to notify you of an account garnishment unless the withdrawal overdraws your balance. Depending on where you live, you may have certain rights and protections against having your bank account garnished.
According to the law, a creditor needs to win a judgment in order to garnish your account. In other words, the lender must file a lawsuit, which requires an attorney to deliver notice to both the borrower and the court. To begin withdrawing funds from a debtor’s account, the creditor needs an order or writ of garnishment, signed by a court official. The Internal Revenue Service (IRS) is the only creditor that can garnish money from bank accounts without a judgment.
Can an LLC Bank Account Be Garnished?
Limited liability companies, or LLCs, are considered separate legal entities, wholly apart from their owners. This means the owners are not personally liable for the business’s debts and obligations. Likewise, the business is not liable for the personal debts and obligations of the individual owners.
An LLC’s bank account may be garnished if the debt is a business debt. If the debt is personal, it will be harder to garnish the account, but it’s not impossible. A garnishment does not occur until a creditor has proved that the debtor legally owes him the sum he seeks.
When analyzing whether an LLC’s bank account is subject to garnishment, the first step is to determine whether the creditor has received a valid judgment against you as the debtor. Typically, the creditor must first sue you and secure a court order demanding that you pay the debt that’s due. If the creditor has not received a judgment against you, the LLC account cannot be garnished.
Once a garnishment is approved in court, the creditor will notify you before contacting your bank to begin the actual garnishment. However, the bank itself has no legal obligation to inform you when money is withdrawn due to an account garnishment. However, you may receive an automated overdraft notification if the garnished amount is greater than your available account balance. The notification of garnishment should come from your creditor and not your bank.
Assume a creditor has received a judgment against you. Next determine the nature of the debt. Limited liability companies shield their owners from personal debts and obligations. If the debt is personal — such as a personal loan made to you as an individual rather than as an agent of your LLC — the LLC account cannot be garnished, unless an exception applies.
How Long Does It Take to Lift a Garnishment?
To lift a garnishment, you can try to contact the collection agency to negotiate alternative payment options. You may be able to lower interest payments, reduce the amount you owe, or make partial payments for a certain amount of time. However, you’ll have more bargaining power if you reach out to your creditor before a judgment is made. It’s in your best interest to prevent an account garnishment from happening in the first place because the process is hard to stop.
Once a garnishment starts, the entire process will typically last at least a month, but could go on for 2 months or longer. A lot depends on how the bank responds and how you respond. In Florida, the bank has 20 days after service of the writ of garnishment to file a response. Some banks do this in one day. But other banks take the entire time.
In addition, you can file a claim of exemption and request for hearing. If you do, a Court will have to schedule a hearing on your exemption claim, which may significantly add to how long it takes to unfreeze the account.
How to Protect Exempt LLC Bank Account Funds Proactively
At the hearing, the judge will review the paperwork to ensure that the funds are exempt, which might prove difficult if you’ve commingled them with other personal money in the same account. Here are some tips that will help you maintain the exempt status of your funds.
- Direct deposit: It will be easier for you to verify an exemption if the government deposits the funds directly into your account. Plus, your bank is required to protect two months of deposits unless the seizure relates to government debt, such as back taxes.
- Exclusive account: The best way to get around a commingling problem is not to commingle the funds in the first place. Keep protected funds in a dedicated account. Use a separate bank account for nonexempt funds.
- Cash checks: If you know that a creditor has a judgment against you and you don’t want to worry about losing your money, don’t put the funds in a bank account. A creditor can’t get what isn’t there.
An individual’s bank account can be garnished if there is a judgment against the individual, and an LLC bank account can be garnished if there is a judgment against the LLC. However, if there is a judgment against just yourself personally, a creditor cannot directly garnish the bank account of your own LLC.
The creditor would first have to get a judgment against the LLC. This is done by alleging a fraudulent conveyance or claiming that the LLC is an alter-ego of the judgment debtor. If you are facing a garnishment, you might be able to raise valid objections. Claiming that the debt is personal in nature and the account sought to be garnished is a business account is one objection.
You can object to the nature of the garnishment, often by pointing out that the creditor didn’t follow the relevant procedure. Because of the sensitive legal nature of garnishments, a decision about objections should be made after talking with an attorney.