Business debt, whether from small business loans, corporate credit cards, or federal and state taxes, can be a challenge to manage. And if the debt remains unpaid for too long, it can exacerbate the situation for many business owners and finance managers.
This unpaid debt can lead to a serious problem for businesses: garnishment. Bank account garnishment can create serious cash flow blocks for companies of all sizes, and those cash flow problems can compound into other issues, like payroll concerns and late payments on other accounts.
Review this guide for everything businesses need to know about bank account garnishment in Texas and how to avoid it.
What is Bank Account Garnishment and What Can Cause It?
Bank account garnishment is a collection procedure that is authorized by a court. When a creditor or a government authority sues a business or individual for an unpaid debt, one of the options for settling is for the court to give the creditor the right to pull the funds from a bank account.
The court will notify anyone who is being garnished by issuing a Writ of Garnishment or Order of Execution. The bank will then place a levy on the account, and they are obligated to execute the garnishment.
Common reasons for bank account garnishment in Texas include:
- Private creditors: These are banks, credit unions, credit card companies, peer-to-peer lenders, hard money loan providers, and other financial institutions. This debt can include anything from credit cards to past due balances on office space.
- Student loans: The most recent data shows that over 10% of student loans are more than 90 days late, which puts them at risk of being turned over to collection agencies. Wage garnishment is a common recovery option, but bank account garnishment is a last resort.
- Unpaid taxes: The IRS doesn’t require court approval to garnish bank accounts for unpaid federal taxes. State tax agencies, however, might still need to obtain a Writ of Garnishment and have a bank levy placed on the debtor.
While there might be property debt situations that warrant garnishment, it’s more often used for unsecured debt, or debt that isn’t backed by any collateral.
Though the IRS can initiate the garnishment process without court approval, other creditors and debt collectors have different requirements depending on the state.
Can Debt Collectors Garnish Bank Accounts in Texas?
It depends on two things: who the debt is for (business or individual) and what type of business the debtor has (sole proprietorship, LLC, LLP, etc.) Sole proprietorships can be at risk for bank account garnishment for both personal and business debt. That means, even if the account is in the company’s name, a creditor or the IRS can place a levy on the assets.
LLCs, LLPs, and corporations, on the other hand, are generally only subject to bank account garnishment for debt the business owes. Members of an LLC can still, in extreme cases, have a business account garnished, however.
Garnishment of Savings Accounts
Savings accounts are not exempt from being garnished in Texas. That means, if a creditor goes to court and successfully sues for bank account garnishment, funds in a savings account can be withdrawn to satisfy the debt.
Writ of Garnishment
The Writ of Garnishment is the final step a creditor takes to have a debt satisfied. Once the court approves the request for bank account garnishment, the creditor can request an Order for Examination of Judgment Debtor, which effectively requires the debtor to furnish their bank information.
The bank information is used to create the Writ of Garnishment. This is submitted to the financial institution that will remit payment from the debtor’s bank accounts.
How Long Do Bank Levies Last for Businesses?
Regardless of whether a business debt is owed to the IRS, state agency, or private creditor, a bank account can be garnished multiple times, until a debt is completely satisfied. There is no limit on how long the bank can attempt to satisfy the writ. The writ is a court order, so switching to a new bank will simply delay the inevitable. A creditor can request a new writ for another bank if necessary.
Can Creditors Freeze or Seize Bank Accounts?
The first thing a bank does when it receives a Writ of Garnishment from the IRS is to freeze the bank account. Depending on the amount of the garnishment, the bank could potentially freeze all accounts a business or individual holds. This freeze lasts for 21 days for the IRS, which gives people time to make payment arrangements.
Judgment in favor of a state agency or private creditor can result in a frozen bank account, as well. In Texas, married sole proprietors can even put their spouse’s accounts at risk for garnishment because of community property laws.
As far as “seizing” bank accounts, a Writ of Garnishment is effectively a seizure of assets. The IRS can also “seize” wages and tax refunds.
Can Creditors Garnish Wages in Texas?
There are three debt situations where individuals in Texas can have their wages garnished:
- Alimony/child support
- Federal taxes
- Student loans
Texas doesn’t have a state income tax, but other state agencies and private creditors cannot sue to have wages garnished.
Wage garnishment doesn’t explicitly impact businesses, regardless of the company structure. However, it is important to have a robust payroll solution that can accommodate garnishments for employees.
How Much Can Debt Collectors Garnish from a Bank Account?
There is no limit to how much a creditor can garnish from a bank account. If the debt is owed and the funds in the account are eligible for garnishment, the Writ of Garnishment can take as much as necessary to cover the judgment.
If the creditor cannot collect all of the funds at one time, additional writs can be filed until the entire debt is paid. This means businesses can perpetually be subject to frozen bank accounts if they do not work with their creditors.
Are There Any Bank Accounts That Cannot Be Garnished?
While virtually any domestic account with a financial institution can be garnished, there are types of funds that creditors cannot seize. These situations generally only apply to sole proprietors, but funds that are not subject to bank account garnishment include:
- FEMA aid
- Retirement benefits for civil service, federal, and railroad employees,
- SSI deposits
- Student loan disbursements
- Veterans’ benefits
A bank can still receive a levy and freeze an account with funds from any of these sources. Bank accounts that receive deposits from multiple sources will have to wait until the bank can separate the income that can and cannot be garnished.
How Long Can Creditors Collect on a Business Debt?
The state of Texas has a statute of limitations of four years for consumer debt, which means most sole proprietors shouldn’t see bank account garnishment beyond that for the personal debt. There is no statute of limitations on collecting business debt, though.
This means that a creditor can collect on business debt effectively forever, or until the debt is satisfied. In addition to that, once a court approves the garnishment, there is no expiration on the Writ of Garnishment presented to the bank. This means a creditor can collect on debt as long as it takes to satisfy it.
How to Avoid Business Bank Account Garnishment in Texas
While businesses should receive notification of judgment, there might not be an explicit notification about bank account garnishment. Many finance managers find out when the actual garnishment is processed, or when a critical payroll withdrawal bounces.
These three tips can help businesses avoid a garnishment situation:
1. Establish a Separate Entity
Sole proprietors that might be at risk for bank account garnishment on their personal debts should consider establishing an LLC to protect their business assets.
2. File for Bankruptcy
Organizations that are potentially going out of business or looking to restructure their debt and company can consider bankruptcy to avoid garnishment.
3. Make Payment Arrangements
The best way to avoid bank account garnishment is to make a payment arrangement with creditors, which can even lead to a negotiated balance.
Bank account garnishments are often a surprise and leave many companies in a lurch. Avoiding it can save a lot of stress and even more money.
Creating a Financial Plan to Handle Unexpected Business Debt
Managing debt can be an overwhelming process for businesses that need to focus on making key sales numbers. It can also be challenging to know what options are available and how to put together an effective plan to pay down debt.
An effective financial plan will include a detailed list of every debt a business owes, as well as establish a reserve account that accumulates funds specifically for unexpected expenses (think an emergency fund, but for businesses.) It will also include guidelines for how much debt a business should be able to take on based on its profits.
Create a financial plan that has a contingency for major expenses and unexpected costs, and make sure there is a dedicated team member to handle past due accounts. This will ensure bank account garnishment doesn’t happen.