What is garnishment?
Garnishment is the process by which a third party seizes assets in order to resolve a debt that is unpaid. In the banking context, this means that a third party seizes money in a bank account to claim unpaid amounts owed by a debtor. For example, the IRS can typically garnish money without first obtaining a court order. Other creditors, however, generally must first obtain a court order showing that a particular debtor owes money and that their wages should be garnished. A typical situation involving garnishment is when a creditor is going after unpaid child support or back taxes.
Garnishing an account vs. Freezing an account
Garnishing an account is distinct from freezing an account. When an account is garnished, a certain amount of money is seized by a creditor. In turn, the amount seized is used to pay off an overdue or outstanding debt.
Freezing an account, on the other hand, is also known as “levying” an account. If an account is levied, a bank prevents the account holder from withdrawing any money in the account. The government, for example, has the power to freeze or levy an account without a court hearing.
What are garnishment laws in Delaware?
The state of Delaware has banned garnishment of bank accounts. 12 Del. C. § 3502(b) states, in relevant part, that: “Banks, trust companies, savings institutions and loan associations, except only as to a wage attachment against the wages of an employee of the bank, trust company, savings institution or loan association, shall not be subject to the operations of the attachment laws of this State.” Therefore, creditors in Delaware face more difficulty in enforcing their claims against debtors. Due to these obstacles, creditors are less likely to prevail in their actions, leading to more protection and asset preservation for individuals and their accounts.
Outside of bank accounts, creditors in Delaware cannot garnish more than 15% of an individual’s disposable income. This is a more debtor-friendly standard than the federal guidelines, which give creditors access to up to 25% of an individual’s disposable income.
Does garnishment apply to nonresidents of Delaware?
If a non-resident of Delaware has money in a Delaware bank account, a conflict of laws analysis comes into play. This means that whatever state has the “most significant relationship” to the account and the parties will prevail, and that state’s particular garnishment laws will apply.
Is the bank garnishment protection in Delaware absolute?
While Delaware law protects banks from garnishment, the contents of an individual’s bank account are not entirely protected from creditors. For instance, creditors still have the ability to obtain and issue a subpoena in order to gain information about a certain debtor’s bank deposits. In other words, while the funds themselves are protected from garnishment, information surrounding bank transactions are not entirely private.
Due to the potential areas for confusion and/or conflict of laws, it is recommended to speak with an attorney or expert before creating or transferring any entities such as a trust or bank account, especially in a state that may not be familiar to you.
Do large Delaware based banks, such as Bank of America, give people that open their accounts in other states the same Delaware protections? Would one need to chose a smaller Delaware based bank that only operates in Delaware to get the protections? Do the protections apply to both individual and business bank accounts?