Prepaid Debit Card and Debt Collections

Can a creditor seize or garnish my prepaid debit card?

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Bill's Answer: Answered by Mark Cappel

The answer to your question hinges on the answers to two questions: 1) Does the creditor know this account exists in your name? 2) Does NetSpend have your Social Security number linked to your name on your account?

If the creditor is unaware of the existence of the account in question, then it will not garnish or levy the account. Customarily, a debtor will be required by court order to disclose the name of his or her financial institutions and account numbers. It is possible for IRS to discover accounts associated with a Social Security number, but that searching ability is unavailable to private creditors, to my knowledge. Therefore, if you were required to provide your Social Security number when you opened your netSpend account it is theoretically possible for some creditors to locate that account.

It is important for you to understand your state laws are regarding consumer protection. Below, I discuss how the collection process works and the traditional methods which a creditor utilizes to collect a debt. I also provide you with the Bills.com resource page that explains what the consumer protection laws are for each state.

When a debtor stops paying on a debt, a creditor will attempt to contact the debtor on the telephone and via the mail. When the number of days since the most recent payment reaches 120-180 days, the account is no longer considered current and the creditor is required by generally accepted accounting principles to "write-off" the debt. Writing-off a debt does not mean the debtor is no longer responsible for the debt, or that collection efforts cease.

The write-off date has almost nothing to do with the statute of limitations for debts. To learn more about the distinction between these issues, read Charge Off, Credit Report, Statute of Limitations & Merged Creditors.

At the write-off point, the creditor will transfer the debt to a late-accounts department, or has the option to sell the debt to a collection agent. The collection agent will buy the debt at a discount. However, the collection agent has the right to collect the entire balance due plus interest.

A collection agent may use aggressive tactics to when contacting the debtor. The collection agent may threaten to call the debtor's employer, file charges with the local sheriff, or say they will park a truck in front of the debtor's house with a sign that reads "Bad Debt" on it. All of these tactics and many others are illegal under the Fair Debt Collection Practices Act (FDCPA). Start here to learn the rights consumers have in collections under the FDCPA.

A creditor -- a debt collector that owns a debt account is a creditor -- has several legal means of collecting a debt. But before the creditor can start, the creditor must go to court to receive a judgment. A court (or in some states, a law firm for the plaintiff) is required to notify the debtor of the time and place of the hearing. This notice is called a "summons to appear" or a "summons and complaint." In some jurisdictions, a process server will present the summons personally. In others the sheriff's deputy will pay a visit with the summons, and in others the notice will appear in the mail. Each jurisdiction has different civil procedure rules regarding proper service of notice. (See Served Summons and Complaint to learn more about this process.)

If you ever receive a summons you should do as it instructs! This is not just a social invitation that you can ignore. In the hearing, the judge will decide if the creditor should be allowed to collect the debt. If the debtor fails to appear, the judge has no choice but to decide on behalf of the creditor.

Therefore, if you receive a summons, the first thing you should do is contact the law firm representing the creditor. Open a negotiation to see if they are willing to settle the debt. If not, it would be wise to respond as indicated in the summons. If there is a hearing, attend it and present your side of the story to the judge. Use facts, tell the truth, dress appropriately, and show the court respect. The court may or may not decide in your favor, but at least you exercised your right to be heard.

The court may decide to grant a judgment to the creditor. A judgment is a declaration by a court that the creditor has the legal right to demand a wage garnishment, a levy on the debtor's bank accounts, and a lien on the debtor's property. Which of these tools the creditor will use depends on the circumstances. We discuss each of these remedies below.

Wage Garnishment

The most common method used by judgment creditors to enforce judgments is wage garnishment, in which a judgment creditor would contact the debtor's employer and require the employer to deduct a certain portion of the debtor's wages each pay period and send the money to the creditor. However, several states, including Texas, Pennsylvania, North Carolina, and South Carolina, do not allow wage garnishment for the enforcement of most judgments. In several other states, such as New Hampshire, wage garnishment is not the "preferred" method of judgment enforcement because, while possible, it is a tedious and time consuming process for creditors. In most states, creditors are allowed to garnish between 10% and 25% of your wages, with the percentage allowed being determined by each state. See Wage Garnishment to learn more about wage garnishment.

Levy Bank Accounts

A levy means that the creditor has the right to take whatever money in a debtor's account and apply the funds to the balance of the judgment. Again, the procedure for levying bank accounts, as well as what amount, if any, a debtor can claim as exempt from the levy, is governed by state law. Many states exempt certain amounts and certain types of funds from bank levies, so a debtor should review his or her state's laws to find if a bank account can be levied. See the Bills.com resource State Consumer Protection Laws and Exemptions for an overview of each state's rules.

Lien

A lien is an encumbrance -- a claim -- on a property. For example, if the debtor owns a home, a creditor with a judgment has the right to place a lien on the home, meaning that if the debtor sells or refinance the home, the debtor will be required to pay the judgment out of the proceeds of the sale or refinance. If the amount of the judgment is more than the amount of equity in your home, then the lien may prevent the debtor from selling or refinancing until the debtor can pay off the judgment. Again, every state has its own rules about property liens, so debtors with a judgment against them who own property should review their state's laws to learn creditor can and cannot do to enforce its judgment. See the Bills.com resource State Consumer Protection Laws and Exemptions for an overview of each state's rules. See the Bills.com Liens & How to Resolve Them article to learn more.

Debt Resolution

If you have a judgment against you, consult with an attorney licensed in your jurisdiction to learn how the judgment will affect you, based on your individual financial circumstances and your local rules.

It is not too late to contact the creditor or the law firm that either represented the creditor or bought the debt, and present them a settlement offer. Even with a judgment in place, the law firm must spend money to try to collect the debt. Getting a wage garnishment, levy, or lien takes time, and time to a law firm is money. The law firm may settle for a lump-sum payment. See "Debt Negotiation and Settlement Advice" before opening negotiations with a creditor. See "What Are My Debt Consolidation Options?" to learn more about your rights and options for resolving the debt.

Important! Get all settlement offers in writing before sending a check to the law firm or collection agent.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

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Comments (11)


Condra J.
Carrboro, NC  |  March 06, 2014
I owe the NC Dept. of Revenue $9000. The State of NC is interested in hiring me and requires direct deposit. If I had my check directly deposited to a prepaid debit card could the NC Dept. of Revenue and IRS freeze my account or put a lien or levy on my funds?
Bills.com
March 06, 2014
State and federal tax authorities have strong powers to levy bank accounts and garnish wages. They don't need to get a judgment against you, but only send a "Notice of Intent to Levy." I recommend that you set up a monthly payment plan. Once you are in a formal payment plan, as long as you make the payments as agreed, all levies are placed on hold.

Wages loaded on debit cards are not exempt from wage garnishment.
Lisa R.
Great Neck, NY  |  December 12, 2013
I have a pre-paid MasterCard. I owe money to the state of New York for child support arrears and a student loan in WHICH I am and HAVE been making regular payments. If I load this card with thousands of dollars over the next few years, is there a chance those institutions can track my name and card number and either put a freeze on this card or garnish the money?
Bills.com
December 12, 2013
Assume any financial account connected to your name or Social Security number can be tracked and uncovered by a motivated party. Put another way, we are unaware of any laws shielding pre-paid debit cards from garnishment or account freeze.
Barbara R.
Southport, NY  |  September 20, 2013
I have a collection agency collecting on a old credit card (2008 opened). I have no idea where this Legacy Visa Credit Card came from but they threatened to send the Police to my house back in April of 2013 so I agreed to start paying on it. Recently, I told them to stop taking payment until they could show me the actual debt. Well the issue is this they say they don't have it that it is a Legacy Visa through First National Bank. So I call them and ask them for the original debt and they say the collection agency has it now so they need to provide it. Not sure what my rights are and I have been making payments since April.They also told me if I stop my payments I would be served court papers by the police and they would then sue me for the debt. Friends are saying I am being SCAMMED. I'm not sure they are wrong. Any advice you could offer me would be greatly appreciated.
Bills.com
September 24, 2013
Did you leave a debt unpaid that could have resulted in collections? It sounds to me that you are saying two conflicting things:
  1. That you have no idea where the debt came from.
  2. That First National told you that the debt was sent to a collection agency, when you called.

Although you can't change the past, your situation is a warning to others to get all the facts straight before making payment on a debt when there are any questions regarding its validity. The "We're going to send the police to your house" statement is a good indication the collector was acting improperly and likely illegally. I recommend that you speak with a lawyer that specializes in Fair Debt Collection Practices Act (FDCPA) violations.

Rhonda O.
July 12, 2012
I live in North Carolina. I had a lawyer from New York contact me about a credit card debt. He threatened me with judgements and bank levies. But from researching this it seems he is wasting his time. It has been over 4 yrs since I paid on this. My only income is Social Security SSI. Section 207 of the Social Security Act (42 U.S.C. 407) states no funds from Social Security directly or after being direct-deposited can be levied. Is this true for North Carolina?
Bills.com
July 12, 2012
The law cited is federal and applies to residents in all states.

The Dept. of Education, IRS, and other federal agencies may garnish (called "off-set") Social Security benefits for delinquent federal loans or IRS debt. Creditors may not touch Social Security benefits, which the law cited explains, with notable exceptions, such as child support.

If your only source of income is Social Security, and your account contains only funds from Social Security, then the contents of your account may not be levied under federal law. However, if you intermingle funds in your account, let's say you received a gift or sold something online and were paid into that account, the account becomes fair game for levy.
Debbie H.
Decatur, IL  |  August 16, 2011
Or as in my case. My son's high school in Indiana took me to court over unpaid school fees. I was never notified as I now live in central Illinois. A judgment was entered and then a warrant for my arrest. I was arrested last month. Paid a $500 bond to get out. Then my court date was switched. Again without my knowledge. Now a bench warrant for my arrest has been issued for failure to appear in court. Yesterday I paid a $500 retainer to a lawyer to clear this mess up. All this over $143 in unpaid school fees. This system is flawed.
Sara H.
Nampa, ID  |  January 28, 2011
Hey Bill- isn't it the inquiry into your credit that they will actually be using to find the account? So if there is no credit check, maybe it's safe. Thanks!
Bills.com
January 28, 2011
One job I have never held is a skip-tracer. Here is what little I do know about the job: Skip-tracers use online tax information, phone number databases, credit reports, utility bills, and social engineering to locate people and their assets. A bag of trash containing bank statements would be all it would take to find a person's assets. Whether a bank account appears in a credit report would not stop a determined person trying to find your assets.
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