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Q: Can student loans garnish your bank account?

May 13, 2020

Ordinarily, your bank account can’t be garnished for a student loan. After you default on a student loan, that changes. When you default, your bank account can be garnished (via a bank levy) for both a federal student loan and a private student loan. But in order to start the garnishment, they have to sue you and have a court judgment entered against you.

Without a lawsuit and judgment against you, your bank account is safe from garnishment for a defaulted student loan.

Exempt funds

Every state has its own laws about protecting certain money like child support payments and disability benefits payments from debt collection. You’ll want to speak with an attorney near you to find out what money is exempt.

You still need to worry, however, about wage garnishment.

The federal government or the debtor collector it hired can send your employer a student loan wage garnishment order for a defaulted federal student loan.

And under federal law, they do not need to sue you and get a court order first.

They can also garnish (offset) your Social Security benefits and offset your federal tax refund.

Click here to read more about Student Loan Default generally and Protecting Your Money After Default.

How to stop a bank account garnishment

There are two ways to protect your bank account from garnishment for student loan debt:

  1. Negotiate a payoff with the judgment creditor or
  2. File a chapter 7 or chapter 13 bankruptcy

In my experience, I’ve found that private debt collectors are open to settling the judgment for less than owed. Usually, they want a lump sum payment for near 50% of the balance or more.

Few people have that type of money lying around. (If they did, they would have put it towards their student loan debt.)

Because settlement likely isn’t an option, bankruptcy becomes the only option to stop the garnishment.

To be clear, filing bankruptcy won’t get rid of your student loans.

You’ll need to file an adversary proceeding to do discharge student loan debt. But bankruptcy will stop a debt collector from taking money out of your bank account and out of your paycheck.

What money can be taken for a defaulted student loan?

What money can be taken for student loans, depends on who the creditor, or, more specifically, whether the loan is a federal student loan or a private student loan.

For defaulted federal student loans, the US Department of Education or a guaranty agency can:

  • garnish your paycheck
  • offset your income tax refund
  • offset your SSI disability benefits
  • ​offset your Railroad retirement benefits and
  • ​take other federal benefit payments you were supposed.

They cannot take your VA payments, pension, or other retirement benefits.

For private loan debt, the private lender can:

  • garnish your wages
  • issue a bank levy on your account and
  • put a lien on your home.

To do any of those things, they have to sue you and get a judgment against you.

Basically, your money is safe from private student loans until you’re sued.

In my experience, many private lenders wait until the statute of limitations is near before they sue. Until then, they’ll rely on other collection activities (phone calls, letters, and destroying your credit score).

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