A bank levy process is a legal procedure by which a creditor empties out all of the money from your bank account in repayment of a debt, and without prior notice. Any creditor who has a judgment against you, including a credit card lender, medical service provider, HOA, or any other type of creditor, can do a levy. The bank levy process is very similar to the wage garnishment process in that your money is forcefully taken from you, against your will. Depending on the amount of money in your account at the time of a levy, a levy can actually be much worse than a wage garnishment. With a wage garnishment, 25% of your earnings are deducted each pay period and sent to your lender. With a bank levy, 100% of the money in your bank account, up to the amount of your debt, is taken out of your account.
California bank levy laws simply require your creditor to file a complaint in Superior Court, obtain a judgment, and then your creditor's attorneys can obtain a levy that directs the sheriff to seize the money in your accounts in repayment of your creditor's judgment against you. In San Diego, your judgment creditor simply hands the sheriff a levy with instructions and asks the sheriff to serve the levy upon one or more financial institutions where you hold accounts. Once the sherif delivers the levy, money in your account are frozen and the financial institution will take the money in your accounts and hand it to the sheriff.
Unfortunately, you won't receive notice of a levy until after the money in your account is frozen. Neither you nor your lawyers will receive advance notice. If you or your attorneys had advance notice, you would simply go and empty out your account, rendering the bank levy process a useless collection mechanism. For this reason, you will only find out about a levy after the money in your account is frozen.
An experienced lawyer can help you file a bankruptcy in time to stop a threatened bank levy. If your lawyer files your case before the sheriff serves (delivers) the levy, then the bank levy process stops and your money in your money will be safe and will not be taken by your creditor. If the sheriff has already served the levy at the time that you file, then the money in your account may be turned over to the sheriff and the sheriff will typically hold the funds pending instructions by the trustee appointed to oversee your bankruptcy case.
Once the levy is served, your bank will hold the frozen account funds for a short period of time (usually 1-2 weeks) in order to make sure that the levy was proper and is not on the wrong person, and to give the account holder a chance to contest the levy if there are valid grounds for contesting it. For example, it may have been served on the wrong person or account, or the account may have contained another person's money, such as a relative. Also, the account may contain protected social security benefits. A San Diego bank levy lawyer can help you obtain a bank levy release and recover levied funds, by proving that the bank levy was wrongful.
If your account has already been levied upon, then your bank will send the levied funds to the San Diego sheriff, who will hold them for 2-3 weeks, before giving the money to your creditor. As long as you file for bankruptcy while the levied monies are still in the hands of the sheriff, your attorney can bring an adversary proceeding to set aside your creditor’s lien on the levied funds as a preferential lien, and have the money returned to you, assuming that the amount of money levied is covered by your applicable exemptions and is claimed as exempt in your petition.
Unlike avoided voluntary liens, such as liens on vehicles, which are preserved for the benefit of your estate (and held by the bankruptcy trustee), avoided involuntary judicial liens, such as the lien created by a bank levy, are preserved for your benefit. You can avoid the lien and claim an exemption in the levied funds. You have one of two options. First, your bank levy lawyer can file an adversary lawsuit to obtain a court order for turnover of the levied funds. Depending upon the amount subject to the levy, it may or may not make economical sense for your lawyer to file such a proceeding if the attorney's fees will exceed the amount recovered. Second, and what is much more economical, your attorney can prepare a letter to the sheriff requesting that the funds be turned over to the trustee because the recent levy on your bank account created a preferential lien, and have the trustee sign the letter agreeing to its substance, i.e., that the levy constituted a preferential lien and are requested to be turned over to the trustee. If the trustee signs the letter, the sheriff is likely to turn over the funds without the need for filing an adversary proceeding and obtaining a court order.
Once the levied funds are distributed to the creditor, they are no longer yours. When the money is in the hands of the sheriff, it is yours but subject to your creditor’s lien, which you can avoid as a preferential lien. Once it is delivered to your creditor, it is paid to your creditor in satisfaction of its judgment lien. It is no longer yours and so there is no money belonging to you for you to claim an exemption in them. The trustee could theoretically recover it as a preferential payment to your creditor, but that would not benefit you since the levied funds would be recovered for the benefit of your creditors.