The truth about Social Security benefits and wage garnishment

By Erica Sandberg

Opening Credits

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. Ask a question. 'Opening Credits' stories

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

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 Administration. 

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.

Erica Sandberg's articles and insight are featured in such publications as the Wall Street Journal, Pregnancy, Babytalk, Redbook, Bank Investment Consultant, Prosper.com, MSNMoney.com, and Smartmoney.com. An active television and radio commentator, Erica is the credit and money management expert for San Francisco’s KRON-TV, a frequent guest on Forbes Video Network, Fox Business News, Businessweek-TV, and all Bay Area networks. Prior to launching her own reporting and consulting business, she was affiliated with Consumer Credit Counseling Services of San Francisco where she counseled individuals, conducted educational workshops, and led the media relations department. Erica is a member of the Society of American Business Editors and Writers, and on the advisory committee for Project Money.

Send your question to Erica.

Published: February 9, 2011

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