A bank levy is a legal action that takes property and rights to obtain property, including bank deposit accounts, of the person liable for a delinquent tax or other agency debt.

When the Minnesota Department of Revenue mails a Notice of Levy to financial institutions, they are required to freeze the debtor’s funds on the day the levy notice is received and deliver those funds to the Minnesota Department of Revenue after 10 days from receipt of anotice. They must also complete and return a Levy Questionnaire within 10 days after receipt. It identifies the funds to which the levy attaches, including the account type and amount, property in the possession of the financial institution, setoffs and adverse interests, as well as the name and phone number of the person completing the questionnaire.

Levy Setoffs

A setoff occurs when a financial institution applies funds in a debtor’s account toward the balance of any outstanding loans owed by the debtor to the financial institution. Occasionally, after receipt of a levy, the institution will claim its “right of setoff” to defeat the levy. This could include funds that are held as collateral for a loan. Minn. Stat. §270C.67provides that a levy has priority over any unexercised right of setoff. In order for the financial institution to assert its right to a setoff, it must submit proof that the setoff was done before the levy was served. When a written loan agreement contains a pledge of a Certificate of Deposit as collateral for the loan, it gives the bank a prior contractual right to the named certificate regardless of setoff or whether the loan is in default.

Adverse Interests

A third party may have an adverse interest in the debtor’s assets located at the financial institution. (For example, an IRS levy may have been done.) This is rare, but, if it is claimed, the institution is required to describe the nature of the third party’s interest or claim and which assets are subject to the adverse interest.

Exemption Claim

The provisions of Minn. Stat. §550.37 and the decision of the Tomczyk 295 B.R. 894 court case provide for certain exemptions from bank levies. The levy notice the Minnesota Department of Revenue sends to the debtor allows the debtor to return an Exemption Claim Form with supporting documentation. The form says it must be returned within 15 days from the date on a letter; however, there is legally no time limit for the debtor to submit an exemption claim. While the most common types of bank levy exemptions are listed on this form, it should not be considered as an exhaustive list. It is possible that funds not falling into one of the listed categories would still be exempt.

Providing Proof

All exemption claims must include documentation to verify which funds are exempt and to what extent. In general, the Minnesota Department of Revenue must see a bank statement that shows the levied amount and the source of all deposits that add up to that amount. When wages are the source, the Minnesota Department of Revenue must also see pay stub copies that correspond with those deposits to make a clear link between wages and deposits.

Time Limits for Exempt Funds.

The debtor has no time limit to file a claim for exemptions. However, the length of time the funds levied upon have been in the bank can make a difference. Using the FIFO (First In, First Out) method to trace the funds, the Minnesota Department of Revenue is concerned only with the funds that were in that account when the bank received the levy.

Some funds are exempt from a levy for only 20 or 60 days after deposit. Generally 75 percent of wages (100% if the debtor earns minimum wage or less) are exempt for 20 days after deposit. That time limit extends to 60 days if the debtor was incarcerated or received relief based on need during the previous six months.

Levy Reduction or Release

If there are exempt funds frozen by a levy, the Minnesota Department of Revenue must issue a levy reduction or a levy release to the bank. We use a Bank Levy Exemption Calculator to determine how much we should reduce a levy. A Reduction of Levy Notice to the financial institution is issued primarily for two reasons:

  • It was determined that part of the funds affected by a levy is exempt and the Minnesota Department of Revenue is not permitted to take more than a specified (reduced) amount.
  • After the Minnesota Department of Revenue sends the levy, the balance of the debt was reduced. This may occur when a secured payment is received or when an adjustment is done to reduce the debt amount. (For example, a debtor files an amended return that results in a reduced debt balance.)

If levy notices were issued to more than one bank and the Minnesota Department of Revenue learns that one is holding funds, they may need to release or reduce the levies (by fax) at the other institutions in order to avoid an overpayment. We do not immediately reduce a levy when an unsecured payment is applied to the debt.

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