In most cases, creditors can freeze your bank account and seize its funds only after winning a lawsuit against you. Even then, federal law exempts some money in your account, including federal student aid, from seizure.
Frozen Bank Accounts
If a creditor sues you and wins, the creditor may be able to collect what you owe by taking the money from your bank account. This process, also called a "garnishment" or "levy," usually begins with the creditor freezing your account to prevent you from withdrawing any money. Your account can be frozen for days, even weeks, before your creditor takes the money from your account. Your creditor can repeat the process of freezing your account and taking your money until you've paid off your debt.
Funds Exemptions
Some money in your bank account may be protected from seizure by creditors. With a few exceptions, money from the federal government, including unemployment, Social Security and federal student aid, cannot legally be seized by a creditor. In some states, such as New York, accounts with low balances can't be frozen, even if the funds normally aren't exempt from garnishment. It's important to inform both your bank and your creditor that funds in your account come from exempt sources. Be prepared to document the source of the money to prevent its removal from your account.
Exceptions
In some cases, federal funds, including your federal student aid, can be frozen or seized by certain creditors. If your debt is for taxes, unpaid student loans or back child support, your creditors can take your student aid money as well as most other federal funds.
Comingled Funds
If your student aid is in the same account as other forms of income, it's more difficult to protect it from garnishment. One way to protect your student aid is to keep your exempt money in a separate account from your non-exempt funds. Ask a representative at your bank whether he can establish a separate account for you.
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