Bank Account Restraining Notices: 6 Reviews of Scope, Exemptions, and Duration

Before a judgment creditor can transfer money from your account to their pocket, it must first restrain the account. The bank does this, freezing the money inside, after being served with a restraining notice. The judgment leads to the restraining notice, and it can apply to any or all of your accounts. It freezes money, but it doesn’t give it to the lender. The notice has a limit: twice the money owed. It also has a time limit: one year from the date the bank was served, unless the judgment is paid or vacated. The big problem is the exemptions, and they apply mostly to consumers, not business accounts.

The mere default on an MCA payment may start this whole process. The funder can and does get a judgment on the whole balance due, all at once. The contract probably has a judgment clause, making it easy. The owner may not learn about the action until their bank rejects a routine payment.

A restraining notice does not need a court order. It is simply issued by the creditor’s attorney (or court clerk) as an officer of the court, and the bank must comply on receipt. This is not a formal proceeding. The creditor does not even have to notify the debtor that it is coming. A separate proceeding will have to take place to actually take the money out of the account.

The total amount frozen cannot exceed twice the value of the unpaid judgment. If the judgment is for $50,000, that means up to $100,000 could be restrained, twice that amount. If the lender has already collected part of the judgment through payments, then the original judgment amount drops to an unpaid balance, and the doubled amount changes. To get the excess released, the debtor would have to file a motion to modify the restraining notice.

What Name the Judgment Carries

What the lender can collect through the judgment depends on what name the judgment carries. If the owner has a personal guarantee and the judgment names the owner, all bets are off, and personal accounts can be included. But if the judgment only names the business, but the bank is told to restrain a personal account, the restraint may be invalid. Whether deposits can be frozen or not depends on the language in the original notice and on how the bank reads it.

Business operating accounts are rarely exempt. But when the owner or operator is a natural person, it’s a different story. These personal accounts can have exemptions. There are several types, such as some types of income, including Social Security, veterans’ benefits and certain other government payments.

Currently, the New York bank account exemption for an individual is $3,425 as of April 1, 2024. For an individual, the restraint notice also cannot encroach on 240 times the minimum wage. In the case of an individual account holder, the bank mails the exemption notice, along with two claim forms for the owner to complete. The owner must return these to the bank and the creditor within 20 days of the postmark. The creditor then has eight days to object and stop the release. If there’s no objection, the bank must release the frozen funds.

The original notice is not indefinite. If the creditor wants to continue the restraint, it can do so by serving a new notice. If the time lapses and the bank has not been served with a new notice, the bank should release the funds automatically, although it’s not a bad idea to call the bank to confirm.

The Paperwork

The creditor that wants to restrain an account has to work out several issues with the paperwork. These start with the restraining notice itself. First, the notice must identify the court the original judgment was entered in, and the index number, the parties, the amount the judgment is for and that the holder of the account is not to release the funds to the debtor. The notice must warn that disobedience is contempt of court. And it must state that the debtor may have exemptions. What if the notice has technical errors, perhaps listing a party by the wrong name or the wrong judgment amount? Then, it could possibly be vacated or modified.

If the owner is determined to get out of the situation, it has options. They start with the judgment. Vacating it cancels the restraining notice. If the judgment has problems, such as an invalid confession or a business not being properly served, vacatur may be an option. If the debt is valid, but the lender is not interested in closing down the business, a partial release might be possible. The lender may agree to release part of the frozen funds for payroll purposes. As well, bankruptcy filing creates an automatic stay that will also stop the restraint, among all other kinds of collections.

There’s also the issue of more than one creditor being at work at the same time on the same account. Several lenders may have a judgment and serve a restraining notice on the same account. The first one to serve is usually given priority. In a business bankruptcy, all judgment creditors are stayed from collecting. However, funders can ask the court to lift the automatic stay, allowing them to collect or restrain funds.

Call the Bank and Get the Details

The first day, call the bank and get the details: creditor name, index number, court, date, amount of the judgment, the date the bank was served, get a copy of the restraining notice itself. Gather the original merchant cash advance agreement, and all payment records. Go to the attorney as soon as possible, and find out exactly what the exemptions are, and if they apply to the account. The owner may want to go to the creditor’s attorney, but this could be ill-advised, particularly if the owner does not have an attorney in place yet. Don’t move money to another account first.

The restraint comes as a surprise, and you need to understand that’s not a takeover. You still have time to negotiate, and even go to court and get it vacated. If the restraint is invalid, the bank may not charge any fees. Don’t dawdle. Every day the money sits frozen in a business account could be another day the business sinks deeper.