What Is a Bank Levy Fee and Why Is It Charged?
Gain clarity on bank levies, the fees banks charge to process them, and how these legal actions affect your finances.
A bank levy represents a serious legal action taken to collect an unpaid debt, directly impacting an individual’s financial accounts. This process allows a creditor to seize funds from a bank account to satisfy an outstanding obligation. Banks, while not the creditors themselves, are legally compelled to comply with these orders and often charge an administrative fee for their role in processing the levy. Understanding both the nature of a bank levy and the associated fee is important for anyone whose account may be affected.
What is a Bank Levy
A bank levy is a legal demand served upon a financial institution, compelling it to seize funds from a customer’s account to satisfy a debt. This collection tool is distinct from wage garnishment, which targets income before it reaches your account. While most private creditors, such as those for credit card debt or medical bills, must obtain a court judgment to initiate a levy, certain government agencies can bypass this step.
Federal entities like the Internal Revenue Service (IRS) and state tax departments have the authority to levy accounts for unpaid taxes without a prior court order, though they are required to provide advance notice. Other government bodies, such as the Department of Education, may also levy accounts for debts like student loans under administrative garnishment processes. The bank acts as a third party, obligated to freeze and eventually remit funds.
Understanding the Levy Fee
The levy fee is an administrative charge imposed by banks for processing a bank levy order. Banks incur time and resources when they receive a levy, including identifying the correct account, freezing specified funds, handling notifications, and ultimately transferring the money to the levying party. This fee covers these operational costs.
The amount of this fee varies significantly among financial institutions but is a flat charge, irrespective of the debt amount. For instance, some banks may charge around $100 for processing a garnishment or tax levy. This processing fee is separate from the actual debt and is deducted directly from the customer’s account by the bank.
How a Bank Levy Impacts Your Account
Once a bank receives a valid levy order, it must freeze the funds in the customer’s account up to the amount of the debt. For federal levies, particularly those from the IRS, there is often a mandatory 21-day holding period before the funds are transferred to the levying agency. During this period, the levied funds become inaccessible.
If the levied amount, combined with the bank’s administrative fee, exceeds the current account balance, it can lead to an overdraft, incurring additional bank charges. Any pending transactions, such as checks or automated payments, may be affected or bounce if the necessary funds are frozen or removed from the account. While the levied funds are frozen, new deposits made into the account after the levy is placed are not affected by that specific levy, though a new levy could be issued for future deposits.
Responding to a Bank Levy
Upon discovering a bank levy, the initial step involves identifying the party that issued the levy and the nature of the underlying debt. This information is provided in the levy notice received from your bank or directly from the levying agency. Contact the levying party directly, whether it is the IRS, a state tax department, or a creditor’s attorney, to discuss the debt, potential payment arrangements, or to address any disputes regarding the levy’s validity.
The bank’s role is to comply with the legal order; it cannot provide advice on the legitimacy of the levy or the debt itself. Review bank statements to confirm the exact amount seized and any associated levy fees. Understanding the implications of the levy for your ongoing financial stability and future planning is crucial.