Can a Certificate of Deposit Be Garnished?

A Certificate of Deposit (CD) is a type of savings account where a fixed amount of money is held for a set period, ranging from a few months to several years. In exchange for committing funds for this specific term, the investor typically earns interest at a predetermined rate. Garnishment, on the other hand, represents a legal process where a portion of an individual’s assets, such as funds in a bank account, is seized by court order or administrative action to satisfy an unpaid debt. This article clarifies the circumstances under which Certificates of Deposit can be subjected to garnishment, outlining the various factors and procedural steps involved.

Are Certificates of Deposit Subject to Garnishment

Certificates of Deposit are generally subject to garnishment, similar to other types of bank accounts like checking or savings accounts. Once funds are deposited into any financial account, they are considered assets belonging to the account holder and can be seized by creditors possessing a valid court order or administrative levy.

The fixed-term nature of a CD does not automatically shield it from garnishment. Even if a CD has not reached its maturity date, the financial institution holding the funds may be compelled to comply with a garnishment order. In such cases, the bank will likely “break” the CD, liquidating it before the agreed-upon term ends. This early liquidation can lead to early withdrawal penalties, which would reduce the total amount available to the creditor. Penalties typically involve forfeiting a portion of the interest earned, or in some instances, a small part of the principal, depending on the CD’s terms and the financial institution’s policy.

Debts That Can Lead to Garnishment

Not all outstanding debts automatically lead to the garnishment of a Certificate of Deposit or other bank accounts. Most often, a creditor must first obtain a court judgment against the debtor. This judgment transforms an ordinary debt into a court-ordered obligation, allowing for collection actions like garnishment. Common types of debts that frequently result in bank account garnishment include unpaid credit card balances, personal loans, or medical bills where a creditor has successfully sued and secured a judgment.

Certain government-related debts and obligations, however, can bypass the need for a prior court judgment. These include past-due child support and spousal support arrears, for which specific administrative garnishment procedures are often in place. Federal and state tax authorities, such as the Internal Revenue Service (IRS), also possess significant administrative levy powers, allowing them to seize funds directly from bank accounts without a court order for delinquent taxes. Similarly, defaulted federal student loans can be subject to administrative garnishment of bank accounts without requiring a judicial ruling.

How a CD is Garnished

The process of garnishing a Certificate of Deposit begins after a creditor has established the legal right to collect a debt. For most private debts, this involves securing a court judgment. Once a judgment is obtained, or in cases of certain administrative levies like those for taxes or child support, the creditor or agency applies to the court or relevant authority for a writ of garnishment or a levy. This writ or levy is then officially served on the financial institution where the CD is held.

Upon receiving the order, the bank is generally required to place an immediate hold on the funds in the CD. The bank will identify the specific CD and, if it has matured, will seize the funds up to the amount specified in the garnishment order. If the CD has not matured, the bank will typically break the CD and seize the remaining funds to satisfy the debt.

Although some state laws or bank policies may vary, the bank is usually obligated to notify the account holder of the garnishment, often shortly after the funds have been frozen. The account holder is then typically provided a limited timeframe, often around 10 days, to claim any applicable exemptions for the garnished funds. If no valid exemptions are successfully claimed within this period, the bank will transfer the garnished funds directly to the creditor or to the court for disbursement.

Protected Funds Within CDs

While Certificates of Deposit are generally subject to garnishment, certain types of funds deposited into them are protected by federal and state laws. These protected funds are exempt from seizure, regardless of the account type in which they are held. Examples of commonly protected funds include Social Security benefits (retirement, disability, and survivor payments), Veterans’ benefits, federal student aid (Pell Grants and federal loans), and public assistance benefits like welfare, unemployment compensation, and workers’ compensation.

Additionally, funds held in qualified retirement accounts (IRAs or 401(k)s) often have specific federal or state protections, even if those funds are invested in a CD within the retirement account. This protection stems from the nature of the retirement account itself, rather than the CD product.

A significant consideration is the practice of “commingling,” where protected funds are mixed with unprotected funds within the same CD or bank account. If funds are commingled, it can complicate the process of claiming an exemption, as the account holder may need to demonstrate the precise origin and protected status of the funds to the court or the financial institution. The responsibility to prove that funds are exempt typically rests with the account holder, who must provide documentation and evidence to support their claim. Financial institutions are generally required to review accounts and automatically protect certain direct-deposited federal benefits within a specified look-back period, often two months, before freezing funds.