When you default on a secured debt, the lender reclaims its collateral, 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 take you by surprise. Unsecured creditors can and probably will freeze your bank account, but you should typically receive some warning if they do so legally.
Creditors can legally freeze your bank account for unsecured debt, but they usually follow 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 get judgments against you before they can take additional steps to collect. This means that they must not only take you to court, but they must also win their case against you. If they're successful, creditors can then use the judgment to seize the contents of your bank account.
State laws can vary, but your bank usually doesn't have to send you written notice of the freeze before it occurs. After all, this would give you an opportunity to thwart the creditor by withdrawing the money. You should definitely receive notice of the lawsuit, however, so you'll know collection efforts are pending. If you don't, the creditor might be cutting corners in a way that's not legal.
The "Freezing" Process
"Freezing" is not the same as "seizure." When your bank receives notice that your creditor is garnishing your account for what you owe, a mandatory waiting period typically 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 might be as long as 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 if you owe $5,000 including court costs and other fees, you'd still have access to $1,000.
Understand Exempt Funds
Some funds in your bank account might be exempt from creditor claims. If so, you should speak with an attorney or otherwise take action during the freeze period to let the court or the creditor know.
Creditors can't take your Social Security benefits, and they can't touch some retirement benefits, disability benefits and veterans benefits. Additionally, if the bank account is not in your sole name – such as if you're married and you hold it jointly with your spouse – a creditor can typically only take half the funds, assuming the underlying debt is in your sole name and not shared with the individual you hold the bank account with. Your spouse's funds might not be exempt in the nine community property states, however. These include Wisconsin, Washington, Texas, New Mexico, Nevada, Louisiana, Idaho, California and Arizona.
Take Legal Action When Necessary
If you didn't receive notice that the creditor was suing you, you have an option. Both federal and state laws require that creditors give debtors due process, warning them that they're taking them to court so they can defend themselves in the lawsuit.
If this is the case or if you don't believe that you ever owed the debt in the first place, you can file your own legal action with the court and ask a judge to vacate the judgment. Without a judgment, your creditor can't take any further action against you. If you only succeed in reclaiming the lost funds from your account but the judgment still remains, the creditor can go after other accounts, place liens against your property, or even garnish your wages.
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