The Difference Between a Lien, Levy, and Garnishment

Facing tax debt can be overwhelming, especially when potentially confusing terms like “lien,” “levy,” and “garnishment” come into play. The trust tax professionals at Tax Relief Counsel are here to break down these intricate concepts and empower you to regain control.

In this article, we delve into the crucial difference between levies, liens, and garnishments, all of which are legal tools used to collect debt. We’ll offer a clear understanding of how each action can impact your assets and income. We’ll also explore the limitations surrounding each approach, ensuring that you know your rights and understand the protections available.

Tax Liability Types: Lien vs. Levy vs. Garnishment

To set the stage for a deeper understanding, let’s first differentiate between liens, levies, and garnishments with a helpful table. Doing so will highlight their fundamental differences, offering a quick reference to help you grasp the nuances of these financial and legal instruments:

Feature	Lien	Levy	Garnishment
Definition	Legal claim against property as debt security.	Legal seizure of property to satisfy debt.	Court-ordered income withholding to satisfy debt.
Types	Tax, judgment, consensual, purchase-money, non-purchase-money, statutory, mechanic’s liens.	Wage, bank account, property, tax levies.	Child support, student loans, back taxes, judgments.
Process	Filing with government office.	Direct asset seizure.	Court order, processed through employers or financial institutions.
Impact	Hinders property transactions, may force sale.	Direct financial impact through asset loss.	Ongoing income reduction until debt clearance.
Execution	Passive security claim.	Active property seizure.	Income interception, no direct property seizure.
Entities	Creditors, government agencies.	IRS, creditors, government entities.	Courts (on creditor’s request).
Removal / Satisfaction	Paying debt or court order.	Debt payment, release, alternative arrangement.	Debt fully paid.

What Is a Lien?

A lien is a legal claim or right against a property meant to ensure that the owner fulfills certain financial obligations. Liens are typically used as security for a tax debt. The U.S. government provides a detailed definition of a lien, outlining its role in debt settlement.

Liens come in various forms, including:

• Tax liens: Secure unpaid government taxes owed on the property.
• Judgment liens: Arise from court orders requiring payment of debts, such as child support or medical bills.
• Consensual liens: Arise with the owner’s voluntary agreement; often used for securing loans or mortgages.
• Purchase-money security liens: Secure financing used specifically to acquire the property, such as a car loan.
• Non-purchase-money security liens: Secure general debts not related to acquiring the property itself.
• Statutory liens: Arise automatically by law, like child support liens or hospital liens for unpaid medical bills.
• Mechanic’s liens: Secure payment for unpaid repair work on a vehicle or other property.

The legal implications of liens are significant. They can hinder the property owner’s ability to sell or refinance their property, as they signify that a tax debt must be paid before the property can be transferred. In some cases, a lien can lead to a forced sale of the property to satisfy the debt.

Imposing a lien typically involves legal procedures like filing with the appropriate government office. Removal, however, requires satisfying the underlying debt through full payment or a court order. Understanding how liens work can help property owners protect their assets and avoid legal complications.

What Is a Levy?

A tax levy is a legal seizure of property to satisfy a tax debt, particularly when a debtor fails to comply with financial obligations. As defined by government sources, a levy specifically targets property or assets rather than imposing a claim against them, as in the case of a lien.

The key difference between a levy and a lien lies in their execution. A lien is a claim against property as security for a tax debt, while a levy involves the actual seizure of property to satisfy the debt.

Types of IRS levies include:

• Wage levy: Authorizes the creditor or government to garnish portions of an individual’s wages at their source and send them directly to the creditor until the debt is satisfied.
• Bank account levy: Freezes and seizes funds in the debtor’s bank accounts, which are then used to pay off the debt.
• Property levy: Allows for the seizure and sale of physical property like vehicles, real estate, or other valuables.
• Tax levy: The IRS utilizes specific levies to collect unpaid taxes, including wage levies, bank account levies, and even property seizures in extreme cases.

The entities authorized to initiate a tax levy have the power to take direct possession of the debtor’s assets, a step beyond the passive nature of a lien.

What Is a Garnishment?

Garnishment refers to the court-ordered withholding of a portion of an individual’s wages or other income to satisfy an outstanding debt. Unlike liens, which create a claim on property without immediate seizure, and levies, which involve direct property seizure and sale, wage garnishment continuously intercepts income at its source until the debt is cleared.

Typical debts subject to wage garnishment include:

• Child support: To ensure consistent support payments for children.
• Student loans: To recover defaulted student loan payments.
• Back taxes: To collect unpaid government taxes.
• Judgments: To enforce court-ordered debt repayment.

Initiating a garnishment typically involves a creditor obtaining a court order from a judge. This order specifies the amount and duration of the wage withholding, which is then sent directly to the creditor from the debtor’s employer or financial institution.

While federal regulations limit the percentage of disposable income that can be garnished, the ongoing nature of wage garnishment can have significant financial ramifications, depending on the debt type.

Are There Limits on Garnishments, Levies, and Liens?

While both creditors and the government have legal tools to recoup unpaid debts, these tools aren’t without restrictions. There are limits to how much can be taken through wage garnishments, how property can be seized through levies, and how liens impact assets.

Limits on Liens

The imposition of liens is governed by stringent legal restrictions, which ensure that they’re applied fairly and justly. Liens cannot be placed arbitrarily — they usually require a court judgment or statutory process intended to verify that the creditor has a legitimate claim.

Certain property types, such as homesteads, personal household items, and specific types of personal income, are often exempt from liens to protect the debtor’s basic living requirements.
Furthermore, liens don’t last indefinitely. Their duration varies depending on the type and jurisdiction, and they must be enforced within this period, or they become void.

If a property owner believes a lien has been wrongfully placed, they can dispute it. Doing so involves filing a legal challenge in court, where they must provide evidence showing that the lien is unjustified.

Limits on Levies

While levies authorize property seizure for unpaid tax debts, they don’t imply complete freedom. Certain assets are off-limits, including primary residences, essential household items, and certain retirement accounts.

If you disagree with an IRS levy, you can file a formal objection with the agency or the specific creditor. Valid reasons include incorrect claims, hardship situations, and procedural errors. Legal counsel can be valuable for building a strong case in these instances.

Levies typically remain in place until the tax debt is satisfied. However, specific conditions can lead to their removal. These include paying off the debt, reaching a payment agreement, or proving financial hardship.

Limits on Wage Garnishments

Federal law protects a portion of your disposable income from excessive wage garnishment. For most tax debts, no more than 25% of your disposable earnings can be garnished each pay period. Disposable earnings are your gross income minus allowable deductions like taxes and mandatory healthcare contributions.

Factors Influencing Limits

Various factors can affect the cap placed on garnishment limits, including:

• Type of debt: For child support or alimony, up to 50% of your disposable earnings can be garnished if you support another spouse or child, or 60% if you don’t.
• State laws: Some states protect a portion of your bank account from levies even if you don’t receive federal benefits.

It’s important to be aware of these factors if you’re facing the prospect of wage garnishment.

Types of Income Exempt from Garnishment or Tax Levy

As mentioned previously, certain types of income are generally protected from both IRS wage garnishment and tax levies, such as:

• Social Security benefits
• Disability benefits
• Veteran’s benefits
• Child support and alimony payments
• Retirement pensions

These legal protections ensure that the debtor retains the funds necessary to cover their basic living expenses.

Your Rights When Facing Garnishment

You have rights even when facing a wage garnishment order.

Some of your options include:

• Objecting to the garnishment in court based on hardship or procedural error.
• Claiming exemptions for certain income sources, like Social Security or veterans’ benefits.
• Negotiating a payment plan with the creditor to avoid garnishment altogether.

It’s advisable to consult a qualified tax attorney to gain a better understanding of your rights in your given situation.

Understanding IRS Notices

Receiving an IRS notice can be unsettling and stir up anxieties about potential errors or debts. However, understanding the different types of notices and their implications can ease that stress and empower you to take informed action.

Notice Type	Main Features
CP14	The first notice you receive after filing your tax return if you owe taxes. It outlines the amount due, including any penalties and interest.
CP90	A final notice alerting you that the IRS intends to levy your assets. It also mentions the right to a hearing.
CP92 or CP242	These notices indicate that the IRS is levying your state tax refund due to unpaid federal taxes.
CP501	A reminder notice of the balance due, typically sent if the amount owed from CP14 hasn’t been paid.
CP503	Another reminder notice sent if the previous balance remains unpaid, escalating the urgency for payment.
CP504	This notice warns of impending levy actions and the possible seizure of state tax refunds if the balance remains unpaid.
Letter 3172	A notice of federal tax lien filing and your right to a Collection Due Process (CDP) hearing.
LT11 or Letter 1058	These are final notices before levy action, similar to CP90. They offer legal notification and explain your right to a hearing.

30-Day Rule Exception

When the IRS plans to place a lien or tax levy on a taxpayer’s property, it must first notify the taxpayer, who then has 30 days to respond or otherwise take action. This notification is known as the “Notice and Demand for Payment.”

The 30-day rule exists to provide taxpayers with a fair opportunity to understand their situation, seek advice, and take appropriate action.

However, there are notable exceptions to this rule where the IRS can bypass the 30-day notice:

• Jeopardy levy: The jeopardy levy comes into play when the IRS deems the tax collection to be at risk, such as in cases where the taxpayer might flee the country.
• Federal contractors: The IRS can garnish payments through the Federal Payment Levy Program without a 30-day notice.
• Disqualified employment tax levy: If the taxpayer owes payroll taxes and has requested a CDP hearing related to employment tax within the last two years, the IRS can seize assets for payroll taxes for other periods without notice.
• State tax refunds: IRS officials can seize state tax refunds without giving a 30-day notice.

These exceptions are in place for situations where standard procedures might impede the IRS’s ability to collect taxes effectively.

Garnishments and Self-Employed People

Self-employed people often have varying levels of income, making wage garnishments more challenging to calculate and enforce. To complicate matters further, the process of garnishing bank accounts, a common method of accessing a self-employed individual’s income, can disrupt business operations by freezing necessary funds.

So while the IRS can’t directly garnish wages, it can take significant steps to collect debts. For instance, officials may contact the self-employed individual’s clients, instructing them to redirect payments to the IRS.

Can Bankruptcy Stop Garnishment, Levies, and Liens?

Filing for bankruptcy can indeed provide relief from garnishments, levies, and liens. The automatic stay issued during bankruptcy immediately halts most wage garnishments, and it also applies to levies, preventing creditors from initiating or continuing with levying your assets.

That said, the extent and permanence of this relief depend on several factors, including the type of bankruptcy filed and the nature of the debts. Chapter 7 provides quicker relief from garnishments and levies, while Chapter 13 can be more effective for dealing with certain types of liens and allowing for the restructuring of debts.

The Bottom Line

Comparing and contrasting liens, levies, and garnishments can be perplexing, and many taxpayers find themselves entangled in a web of legal intricacies and financial uncertainty. Ramy Shabana, seasoned tax attorney and founder of Tax Relief Counsel, has the knowledge and resources to help you navigate your unique circumstances.

As an experienced tax lien and levy lawyer in Washington, D.C., Ramy can meticulously evaluate the particulars of your situation and explore all viable legal avenues. He’ll devise a tailored strategy centered on your specific needs while fiercely defending your rights.

Whether you’re contending with an unwarranted garnishment, striving for a manageable repayment solution, or seeking liberation from an oppressive lien, our team will provide much-needed support and work diligently to protect your assets.

Contact us today for a free consultation to embark on your journey toward financial stability and peace of mind.