Debt is the easiest thing to accumulate but the hardest to get rid of. If you’re not careful, the amount of debt you have could be so high that the ability to pay it down could be unreasonable. One aspect of having debt that could be challenging is the process of creditors attempting to collect the debt, especially when there is uncertainty about repayment.

Many people look forward to times where additional funds are received, such as a tax refund. This could be an opportunity to pay creditors and get debt repayment back on track. But what many people who are in debt want to know is if private creditors can access documentation of tax returns or their funds before they do.

Can Creditors Access Tax Return Refunds?
Federal law prohibits private creditors from accessing tax return documents or withholding tax return refunds. Only federal or state agencies can withhold tax return refunds or access information that’s on tax returns. For example, if you owe back taxes from previous years, the IRS or state tax office can retrieve your tax refund.

Recently, the IRS has begun outsourcing collections to private agencies. However, the accounts that get outsourced have certain circumstances as all past due accounts are not outsourced. If the IRS cannot locate you or communicate with you for at least a year, or two years have passed since the assessment, they can likely outsource your account.

The accounts of those subject to installment payment plans, identity theft victims, the deceased, and minors will not be sent to private collection agencies. Most importantly, even though the IRS directly outsources overdue accounts, it does not mean that these agencies can access any tax documents or tax refunds for collection purposes.

Accessing Bank Accounts
Tax returns and tax refunds are one area of concern when it comes to collections, but bank accounts are another area of concern on their own. The severity of your accounts is what may determine if creditors will attempt to collect debt straight from your bank accounts.

As stated before, private creditors cannot access your tax return or refund. However, if your tax refund is received via bank deposit, then those funds could now be up for grabs. Depending on the state you live in, the law could allow private creditors to collect the debt from your bank account ultimately.

To avoid the surprise of withdrawn funds in your bank account, steps to prevent these measures should be taken.

Preventing Private Creditors From Accessing Funds Without Willful Payment
In most cases, creditors won’t be making efforts to access your bank account unless your accounts are very behind. This won’t happen just because you’re a few days late on a payment. Therefore, the first step is to do whatever is necessary to avoid falling very delinquent.

Consider debt repayment plans or debt consolidation to negotiate with creditors on how to pay them back. These efforts restore good faith with creditors so they won’t have to take measures that involve trying to access your money.

Since the pandemic occurred, there have been options for businesses to receive loan forgiveness for borrowed funds. If you have loans from private lenders, there may be the possibility that part of the balance can be forgiven. See if this can apply to any personal loans you have currently. Try to remain current with repayment as good standing could be a possible requirement for loan forgiveness. In some cases, a certain amount must be repaid first before any amount is forgiven.

Private creditors need to have a trusted relationship with their debtors. A trusted rapport can be a sign of good faith for creditors. Be sure to keep all information updated with creditors. If you can’t make a payment on time, communicate with creditors by providing a promise-to-pay or a set date you can have the payment sent.

Work on Consistent Good Habits
Eliminate the possibility of private creditors accessing your bank accounts by having good habits when it comes to debt. Be sure to know that all debt isn’t bad if you know how to use debt to your advantage. Consumer debt should be avoided and if you take on consumer debt, keep utilization low and repayment consistent.

Lyle Solomon is a licensed attorney in California. He has been affiliated with law firms in California, Nevada, and Arizona since 1991. As the principal attorney of Oak View Law Group, Solomon gives advice and writes articles to help people solve their debt problems. You can connect with him on LinkedIn or tweet him at @lyle_solomon.