New rule protects exempted funds from garnishment orders
Debtors no longer have to worry about frozen exempted funds
By Martin Merzer
The latest in a series of new federal regulations intended to
protect credit card holders and other indebted Americans has kicked in,
and this measure covers new ground: It offers aid and comfort to some of
the nation's most desperate debtors -- those who face frozen bank accounts and,
ultimately, seizure of the funds in those accounts.
As of May 1, 2011, banks and other financial institutions no
longer can automatically freeze accounts that are subject to garnishment orders
won by credit card companies, their representatives or any other creditor.
Instead, banks, credit unions and similar institutions must examine those
accounts -- and ensure that electronically deposited federal benefit payments are
exempted from the garnishment order and remain available to account holders.
Among the federal payments that cannot be slapped into the
deep freezer and later thawed and ladled out to creditors: Social Security benefits, Supplemental Security Income benefits, veterans benefits, federal employee
and civil service retirement benefits, and benefits administered by the
Railroad Retirement Board.
The move is seen as a significant reform that will pre-empt inconsistent state
rules and clarify procedures for banking institutions. Most importantly, it
will end a practice that often left many of the nation's most debt-ridden and
impoverished people -- including retirees, veterans and the disabled -- without
even the minimal financial resources they needed for food, shelter, health care
and other matters of basic subsistence.
Consumer advocates estimate that more than 1 million low
income people each year, including hundreds of thousands of credit card
customers, received Social Security and other federal payments that were
improperly frozen as a result of garnishment orders. These actions often
rendered such people temporarily destitute.
"We applaud the work of the Treasury Department and the
other agencies to safeguard these essential benefits ...," said Margot Saunders,
an attorney with the National Consumer Law Center, which represented Consumers
Union, Public Citizen and 19 other consumer groups before the U.S. Department
of the Treasury, which took the lead in crafting the new
"All too often, elders, veterans and disability benefit
recipients who rely on these benefits for their basic needs have been unable to
access them for extended periods because of creditor-imposed garnishment
freezes," she said.
We recognize that the procedures
that banks had to follow before the rule could result in very real hardships
for some individuals ...
American Bankers Association
On the other side of the equation, the American Bankers
Association, the trade group representing virtually all of the nation's banks, also expressed
"The ABA supports adoption of the proposal," said Mark Tenhundfeld,
a senior vice president of the association. "We recognize that the procedures
that banks had to follow before the rule could result in very real hardships
for some individuals, and so we support a rule that avoids those hardships by
protecting the customer's access to funds."
Banks caught in the
Put simply, garnishment is a last-ditch effort by a creditor to collect
legitimate debts owed by consumers. If you become and remain delinquent in your
payments, and if you fail to respond to a series of efforts by the creditor or
its representatives to collect the amount due, the creditor can obtain a court
order allowing it to "garnish" your account and seize your money.
Such garnishment orders generally come in two flavors: If
you are earning a paycheck, the court can order your employer to divert a
portion of your wages to the creditor. If you are not employed, the court can
order your bank to turn over to the creditor some of the proceeds of your
When the account is frozen, no money is available to cover
any expenses for food, rent or medical care.
National Consumer Law Center
Social Security and other federal payments that end up in
your bank account have been exempt from court-issued garnishment orders for
years, but those orders often produced inconsistent or overly broad responses
by banks that found themselves between a rock (court orders won by creditors)
and a hard place (account holders needing access to their money).
"On the one hand, a creditor, having received a court order
entitling it to payment, expects the bank to comply with that order or risk
incurring liability for the full amount of the judgment," Tenhundfeld of the
bankers association said last year in a letter to the U.S. Treasury. "On the
other hand, a debtor that receives benefits payments that are exempt from
garnishment expects the bank to refuse to pay to the creditor funds that are
In the end, many banks and other financial institutions simply
froze the entire account and then required consumers to prove that the funds --
or a particular portion of the funds -- in that account came from exempted
federal sources and should not be and could not be frozen or seized.
The process of unfreezing an account could take weeks or
even months, consumer advocates said, and usually required the assistance of an
attorney. As a consequence, it often took a heavy toll on credit card holders
and others who already were nearly at their wit's end.
"When the account is frozen, no money is available to cover
any expenses for food, rent or medical care," the National Consumer Law Center
noted. "Checks and debits previously drawn on the account, before the recipient
learned that the account was frozen, are returned unpaid. Subsequent monthly
deposits into the account will also be subject to the freeze and inaccessible
to the recipient."
The NCLC offered several examples, including the case of Ethel Silmon of
Montgomery, Ala. A disabled, 59-year-old widow, she fell behind on her credit
card payments. Her bank account ended up getting hit with a garnishment order
for $15,895.44. The only money in her account -- less than $1,000 -- came from
her $889 monthly Social Security disability payments, funds that should have
been exempted from the order but were frozen by the bank. It took her -- and a
volunteer attorney -- about four weeks to sort it out.
"During the month without access to her money, Mrs. Silmon
suffered severe anxiety attacks. She had to go to the food bank for food and
had to rely on her doctors for samples of medicine," the Center reported. "She
is still fearful that they will try it again and states that she cannot handle
it if they do."
Attorneys and consumer advocates say the regulation that
takes effect May 1 should go a long way toward preventing similar cases in the
future. The new garnishment rules come in the wake of other recent federal
efforts to protect consumers, including the staged phase-in of landmark credit card reforms and creation of the Consumer Financial Protection Bureau.
Applies only to direct deposits
Importantly, the garnishment regulation applies only to
electronic direct deposits. It does not apply to old-fashioned paper deposits
of federal payments. Those deposits also are exempt from garnishment, but banks
are not required under this regulation to identify or protect them. This
should not pose much of a problem, given that 87 percent of Social Security
recipients received their payments electronically last year, and the federal
government is making electronic delivery mandatory for virtually everyone who
receives federal payments.
- The federal government
must insert an electronic "tag" in all direct deposits of exempted
- When a bank receives a
garnishment order from a court, it must review the debtor's account within
two business days and determine what -- if any -- federal payments are
exempt under the new regulation. Those payments cannot be frozen or
- Banks are required to exempt
all tagged deposits made during the two months prior to the receipt of any
garnishment order and protect those deposits from garnishment. No longer
will consumers be required to identify or help segregate payments that are
exempt from garnishment.
- Within three business days
of receiving the garnishment order, the bank must provide the debtor with
the name of the creditor, the date of the garnishment and the amount of
both protected and nonprotected assets in the account.
- As in the past, amounts
owed for federal taxes and in response to state child support agencies cannot be protected from
garnishment -- even if they come from otherwise exempted federal sources.
In other words, even under this new regulation, your Social Security or
federal pension payments can be garnished to pay for overdue federal taxes
or for child support.
Though both sides of the issue -- the banks and consumer
representatives or attorneys -- had urged federal officials to tweak an early
version of the regulation in various (and mostly minor) ways, everyone seemed
pleased with the result.
"This rule is truly an amazing and wonderful thing ...," the
National Consumer Law Center said in a written statement. "The Treasury
Department has led a remarkable effort."
"The agencies have tried hard to strike the right balance,"
said ABA's Tenhundfeld. "While the rule will result in additional burdens for
the banking industry, we believe the balance struck by the agencies is
See related: How wage garnishment works -- and how to avoid it, Wage garnishment after unemployment, Take these steps to avoid wage garnishment, After medical bills lead to wage garnishment, consider bankruptcy, 3 ways to rebuild your credit after wage garnishment, Bankruptcy protects against wage garnishment, The truth about Social Security benefits and wage garnishment, Ignoring debt collection lawsuit can lead to wage garnishment
Updated: May 3, 2011
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