If money disappears unexpectedly from your bank account, your first thought may be that you’re a victim of identity theft. While that can happen, it’s also possible for your money to be taken from your account legally—which can be a big shock if you’re not prepared.
If you have a debt and aren’t able to make payments, a debt collector may be able to legally take money out of your accounts or from your wages through the process of garnishment or right of offset. Here’s what you should know about how debt collectors can use these methods to legally take money from your bank account.
What are garnishment and right of offset?
There are two main ways a debt collector or other creditor can legally take money from your bank account:
- Garnishment from a court order
- Right of offset exercised by your bank or credit union
When a court determines that you owe a creditor money and then authorizes the creditor to take money directly from your paycheck or bank accounts, that’s called a garnishment. The court’s judgement, or order, will spell out how much you owe, which can include the amount owed to the creditor and sometimes other costs such as attorneys’ fees and court costs. Creditors can use the judgement to garnish your wages, take money from your bank accounts, and put a lien on assets you own, like your house.
The IRS can also garnish (levy) your wages without a court order if you don’t respond to their notices that you owe money.
Limits to garnishment by debt collectors
Federal law limits garnishment on your wages to a maximum of 25% of disposable earnings. It also limits garnishment of federal benefits, such as Social Security and VA benefits. However, there are exceptions, such as garnishing federal benefits to pay debt owed on a federal student loan.
Other types of benefits usually protected are:
- Child support
- Unemployment benefits
- Welfare benefits
- Workers’ compensation
- Disability benefits
Individual states also have their own rules limiting garnishment by debt collectors. For example, California state law stops debt collectors from taking more than 25% of a person’s paycheck, and also protects $1,724 of combined bank account balances. These limits were created so that families would at least have enough money to afford basic needs. Under Texas law, garnishment is permitted for child support, alimony, taxes, and student loans, but not for other debts like car loans and credit cards.
While state and federal limitations don’t completely stop creditors from taking money from your bank account or paycheck, they do put a limit on how much they can take. It’s important to know that when there’s a difference between the state and federal limitations, whichever restricts garnishment more wins out.
Right of offset
Sometimes a financial institution can take money from your account without a garnishment court order, using something called ‘right of offset.’ Also called ‘right of set off’ or ‘combination of accounts,’ right of offset is when a bank or credit union can take money you have on deposit with them (such as in a checking or savings account), and use that money to pay off a debt you owe them, such as a credit card or car loan. This is only allowed if the financial institution you owe money to is the same financial institution where you have your checking and/or savings account.
Here’s how it works. Let’s say you have a car loan at your local credit union. Because you lost your job, you are three months behind on your monthly payments of $300, and owe $900. You ask a friend to loan you $1,000 to help with this month’s rent. On the day after your friend’s money is deposited into your checking account, the credit union takes $900 out of your account and uses it to pay down your car loan. Your car loan is now current, but you still don’t have enough money to pay rent, and now you owe your friend $1,000.
Unlike garnishment, which requires a court order and for you to be legally notified before your money is taken, a financial institution can choose to take the money you owe without telling you first. Federal law prohibits national banks from using right of offset on credit cards, but other loans, like car loans, are fair game. Smaller institutions, like credit unions, often have more freedom in using right of offset.
What can you do about offset?
The short answer is not much. If you’re having difficulty paying your debts and are concerned about right of offset, read your account agreements (the pages of fine print you signed at the time you opened the accounts) to understand your rights and the financial institution’s rights according to the contract you signed. It’s also a good idea to contact your financial institution early on to see how they may be able to work with you so that you’re not surprised by money disappearing from your account.
Can a debt collector take your stimulus check?
The CARES Act specifically prevents state and federal agencies from taking Americans’ stimulus money for things such as federal student loans and taxes owed to the IRS. However, it doesn’t prevent private debt collectors from taking stimulus money. To cover this loophole, some states passed regulations preventing creditors from taking stimulus money. If you’re concerned about this possibility, check to see what your state has done to protect consumers.
Get help early to avoid garnishment by debt collectors
The best way to avoid having your bank account garnished by debt collectors is to make a plan for handling your debt before you fall far behind on payments. If you are already behind on $15,000 or more in credit card debt and fear debt collectors could start garnishing your wages, talk with a Certified Debt Consultant at Freedom Debt Relief to find out what options you have. They are experts in consumer debt and can help you find a solution that fits your financial circumstances. Get started right here.
- Saving Your Sanity: How to Deal with Debt Collectors (Freedom Debt Relief)
- Protecting Your CARES Act Stimulus Check From Debt Collectors and Bankruptcy (NOLO)
- How to Stop Debt Collection Calls (Freedom Debt Relief)
- How to Manage Debt in a Financial Emergency (Freedom Debt Relief)