A levy is a lawful process where the property of a debtor is seized when the debtor is unable to pay for the outstanding debts. It is different from liens as the lien is only a claim against a property to obtain the payment whereas levy is an actual takeover of the property to fulfil the debt.
A levy is a legal process that is performed by a bank or taxing authority. In this process, a bank or taxing authority is granted with rights to seize the property of the debtor, which can be both, tangible and intangible. Tangible may include assets such as cash, house, car, etc., while future wages come in intangibleIntangibleIntangible Assets are the identifiable assets which do not have a physical existence, i.e., you can't touch them, like goodwill, patents, copyrights, & franchise etc. They are considered as long-term or long-living assets as the Company utilizes them for over a year. . It is a bit different from the lien as the lien is only a claim against a property to get the payment whereas in levy there is an actual takeover of the property to fulfil the outstanding debt.
How a Levy Works?
It works as follows –
- Warning: Levy is done only when the creditor is unable to get the money back even after trying. So, the debtor is given a warning that the creditor will take legal action against such debtor. In such a case, no further warnings are given by the bank or taxation authority.
- Option to Dispute: The debtor has the chance to dispute a levy. By doing so, the debtor can reduce the actual amount of money which can be taken by the creditor or can even avoid it.
A levy is done by the bank or taxation authority such as the Internal Revenue Service (IRS). They might seize the property of the debtor to fulfil the debt. For example, Suppose Mr. X took a sum of $10,000 from Mr. Y but even after the due date, Mr. X is unable to return the debt amount. When Mr. Y gave up on it, he filed a complaint in IRS with some legal proofs. IRS, after checking the proofs provided by Mr. Y, took necessary legal actions against Mr. X and seized his property to satisfy the debt. The amount of $10,000 is returned to Mr. Y by the process of the levy.
How to Stop a Levy?
- Payment of Debts: If the debtor makes the payment of the debt before the property is seized, it can be stopped, however, it is not possible when the debtor is not in a financial condition to pay.
- Agreement of Payment with a Creditor: When the debtor makes the creditor negotiate an agreement of payment, the levy can be stopped.
- When it is declared that the Creditor made a Mistake: When a mistake is found out on the creditor’s side, then it can be stopped.
- If the Statute of Limitations Expired: A statute of limitations means the creditor has to collect all the debts before the expiration of the statute of limitations and if such a period is over then the levy will be stopped.
- When the Funds in the Account of the Debtor are declared Protected: There may be some funds in the account of the debtor which can’t be used for levy such as child support fund, social security funds, etc. Such types of funds are safeguarded against levies.
Requirements of Levy
- The IRS firstly examines the tax; then the payable tax bill is sent to the debtor as demand for the payment of a debt.
- If the debtor makes the payment of the tax bill then no further action is taken against the debtor, however, if the debtor does not pay which may be due to some financial problem then, implications will follow.
- The IRS will send the debtor a notice about the purpose of the levy, usually 30 days before its process. The notice can be sent through the mail or delivered to the house of the debtor.
- The IRS then sends the debtor a warning about the involvement of the third party, if any. The IRS communicates with the third parties to collect the tax liability of the debtor.
When will the IRS issue a Levy?
When the debtor is unable to pay the debt even after being notified due to any reason, and it is the final, and the only option left for IRS to satisfy the debt then the IRS will send a notice of levy to the debtor 30 days before it and after fulfilment of the 4 main requirements. Then the IRS may levy the property of the debtor which can be done by levying the intangible property such as wages, dividends, retirement accounts, accounts receivablesAccounts ReceivablesAccounts receivables refer to the amount due on the customers for the credit sales of the products or services made by the company to them. It appears as a current asset in the corporate balance sheet., or life insurance, etc. as well as tangible property such as a car, or house of the debtor.
This has been a guide to Levy & its Meaning. Here we discuss how does it work along with examples, requirements and its issuance. You can learn more about from the following articles –