Can Collection Agencies Levy Your Retirement Account?

Regardless of how much cash you've socked away in your IRA or 401(k), your retirement accounts are exempt from commercial creditors, such as banks and credit card companies, and the collectors they hire. In addition to your retirement savings, your retirement income is protected as well. Thus, you need not worry that a collection agency will intercept and garnish your Social Security checks, veteran's pension or other forms of retirement income.

Your bank accounts are never safe after a lawsuit. Collection lawsuits often end with the collection agency holding a judgment over the debtor. This judgment gives the collector the ability to freeze your bank accounts in order to seize as much of your money as possible to put toward the debt you owe.

If your bank account contains retirement income, collectors aren't allowed to seize it. Unfortunately, that doesn't mean they won't try. In most cases, your bank will automatically protect retirement income in your bank account, but it doesn't hurt to notify both your bank and the collection agency of your exempt status before the collector attempts to seize it.

Individual debt collectors often work on a commission. This gives them a strong incentive to say and do whatever it takes to convince you to pay up -- including threatening to seize your retirement accounts. The Fair Debt Collection Practices Act, which regulates third-party debt collection in the United States, strictly prohibits debt collectors from threatening to take an action that the company either cannot or will not take. Threatening to seize your retirement money falls into this category, since the collector cannot legally carry out its threat. Should this occur, you have the right to sue the collection agency for violating your rights under federal law.

There is one circumstance in which your retirement accounts aren't safe from collectors: Owing money to the federal government, which may seize funds that are exempt from collection efforts by other creditors. If you owe back taxes or you have defaulted on a government-issued student loan, for example, the government has no qualms about garnishing your Social Security or raiding your IRA. In addition to seizing your income and savings, the government can seize other substantial assets, such as your home, car and annual tax refund.