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New rules force banks to protect funds from garnishment

If funds are exempt, onus is on the bank to ensure safeguards are in place

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Credit Care
'Credit Care' columnist Kim McGrigg
Kim McGrigg is Community Manager for Money Management International, where she provides personal finance education information to consumers.

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Question for the CreditCards.com expert

Dear Credit Care,
We are on a fixed income and only have credit card debt. Our income consists of our two Social Security payments, husband's pension from the electrical union, a pension payment from NECA and funds transferred from his IRA. Are all of these deposits safe? -- Leon

Answer for the CreditCards.com expert

Dear Leon,
From your question, I am guessing that by "safe" you mean whether or not the funds deposited in your bank account are exempt from garnishment. If that is your question, then the answer is yes, and maybe. Let me explain.

In May 2011, a U.S. Treasury Department regulation regarding garnishment orders for bank accounts where federal funds are direct deposited that became effective. The basics of the law include the following:

  • Upon receiving a garnishment order, the bank must issue you a notice outlining the actions taken regarding your account and the order to garnish.
  • The bank must protect any federal benefit payments from the Social Security Administration, Department of Veterans Affairs, Railroad Retirement Board and Office of Personnel Management that were direct deposited into your account.
  • The bank must establish the amount to protect by reviewing your account for federal deposits (that must tagged by the depositor) during the previous two-month period.
  • Protections may not apply for federal or child-support debt.

So, in your case, the bank would review your account and add up the Social Security deposits for both you and your husband for a two-month period. Should you and your husband combined receive $4,000 per month in benefits, then the bank would automatically protect $8,000 from garnishment. Any amount in the account in excess of $8,000 would be eligible for garnishment. The protections do not apply if any of the federal payments have been moved to a different account, such as a savings account.

For the remainder of the funds in your bank account -- retirement income in the form of pension payments and IRA withdrawals -- most state laws exempt this type of income from garnishment. However, the only way to know for sure is to find out what laws apply in your state. You can learn about your state’s laws by contacting the attorney general’s office in your state. In addition, the bank does not have to protect these funds from garnishment in the same way it does federal benefits deposits. Any funds in your account at the time the bank receives a garnishment order that do not qualify for protection under the new federal regulation would be frozen. You would then have to file an exemption form with the court that processed the garnishment order to prove that the funds are exempt from garnishment.

Having any portion of your monthly income unavailable would cause a hardship for most people. Going through the process of filing an exemption with the court could take weeks, during which you will not have access to your unprotected funds.

My recommendation is that you work with your credit card issuers to come to a payment resolution before things progress to your being sued in court. Once in court, if the debt is viable and owed by you, the creditor will win in the majority of cases. After a win in court, the creditor would be issued a judgment for the amount owed, which the creditor can file with the court to garnish your bank account. I believe you can come to a resolution to avoid possible garnishment. If you need help negotiating with your creditors, consider contacting a reputable, nonprofit credit counseling agency, such as the Association of Independent Consumer Credit Counseling Agencies or the National Foundation for Credit Counseling.

Handle your credit with care!

See related:
The truth about Social Security deposits and wage garnishment, How garnishment works -- and how to avoid it

Kim McGrigg is the community manager for Money Management International, the largest nonprofit, full-service credit counseling agency in the United States. You can find more money management advice on Blogging for Change and MMI's Facebook page.

Credit Care answers a question about a debt or credit issue from a CreditCards.com reader each week. Send your question to Credit Care.

Published: August 15, 2011


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