The truth about Social Security benefits and wage garnishment
Erica Sandberg is a prominent personal finance authority and author of "Expecting Money: The Essential Financial Plan for New and Growing Families." She writes "Opening Credits," a weekly reader Q&A column about issues for people who are new to credit, for CreditCards.com.
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Dear Opening Credits,
I seem to recall reading
that Social Security payments cannot be garnished. If someone were to default
on a credit card and have a judgment placed against them, how would a bank know
not to honor an attempted freeze and withdrawal from a Social Security-funded
checking account? Could this be an issue with 10,000 baby boomers retiring
every day? -- Dave
Your memory is correct about the laws
concerning such government-issued monies. In general, Social Security benefits
are indeed exempt from post-judgment collection techniques, including wage garnishment (the process that allows a creditor to take a portion of your
paycheck) and bank account levies (the process that allows a creditor take the
cash in a checking, savings or investment accounts).
Credit card companies, banks,
collection agencies, doctors, hospitals, finance companies and other such
creditors do have the right to sue you for nonpayment, and depending on state
law, they may also be able to garnish your wages and tap into allowable assets.
However, they can't take the money you receive from the Social Security
Now there are some noteworthy
exceptions to the law. For example, if the debt incurred is for child or
spousal support arrearage, unpaid federal income taxes or overdue public
library fines, then garnishments and levies may be allowed.
OK, I'm just kidding about library
fines. But if you owe money for the first two reasons, the cash you receive
from Social Security is at risk of being taken and applied to the balance due.
As you gathered, though, problems may
arise if you deposit those benefit payments into a savings or checking account
and commingle the funds with those from other sources. If creditors for debt not related to the IRS or child/spousal support payments sue you in a court of law and win, the judge may
still permit them to use post-judgment collection actions to collect on the debt.
This means that if they're allowed to jump into a bank account that has assets
from a variety of income sources, including Social Security benefits, it will
be very difficult to stop them.
So what can you do to protect the money
you receive from the government? The Social Security Administration suggests
opening a separate bank account and depositing only your Social Security
benefits checks into it. Do so and you should be fine.
Now, returning to your baby boomer
question... Well, it would be fabulous if no impending retirees were burdened with
scary legal matters that would put their finances in peril. Of course, like the
rest of the American population, however, many will begin their golden years
dealing with debt and insufficient savings.
According to a 2010 Retirement Fitness Survey from Wells
Fargo, 39 percent of the respondents said they "will need to work" to
make ends meet or maintain their lifestyles. While that may not sound so bad on
the surface, imagine how hard it could be for those who are unable to remain
employed due to age-related health concerns.
The fact is,
Dave, that Social Security benefits, even when shielded from levies and wage
garnishments, are rarely enough for most people to exist on comfortably. Therefore, it is imperative that anyone appoaching retirement concentrate on
living within their means, deleting debt, saving aggressively and investing prudently.
See related: 11 tips for dealing with debt collection agencies
, How wage garnishment works -- and how to avoid it
, What's the best way to pay the IRS?
Erica Sandberg is a nationally renowned personal finance authority. She’s host of several financial web shows, and a frequent guest for media outlets such as Fox, Forbes, Nightly Business Report and NPR. Erica previously was affiliated with Consumer Credit Counseling Service and was KRON-TV’s on-air credit expert. Her book, "Expecting Money: The Essential Financial Plan for New and Growing Families," was published in 2008 by Kaplan Press.
Send your question to Erica.
Published: February 9, 2011