by: The Academy of Special Needs Planners
Recipients of federal benefits like Supplemental Security Income have complained for years that in response to creditors’ demands, banks have been freezing their accounts containing desperately needed government benefits. In response, several federal agencies, including the Social Security Administration and the Department of Veterans Affairs, recently proposed new regulations that will prevent banks from completely freezing bank accounts that receive certain benefit payments, including Social Security Disability Insurance payments, Supplemental Security Income, and Veterans benefits.
Under current federal law, creditors are not allowed to seize most federal benefit payments in order to satisfy a beneficiary’s debts. This prohibition on attaching federal benefits applies to almost all types of consumer debt, although exceptions do exist for the collection of child support or unpaid federal taxes. However, despite the law, many creditors go to state court and obtain what is known as a “garnishment” order, which allows the creditor to seize funds directly from a debtor’s bank account. Since most government benefit recipients have their monthly payments deposited directly into their bank accounts, the garnishment can indirectly result in the seizure of government benefits despite the prohibition on doing so.
Since banks do not want to violate federal law by allowing creditors to seize the government benefits, they will often simply freeze a debtor’s bank account until a court can sort out what portion of the account can be legally seized by the creditor. This freeze causes incredible hardship for a beneficiary because the account usually contains the beneficiary’s entire means of support, and it can take months for a court to order the bank to unfreeze the funds.
Under the proposed regulations, if a bank receives a garnishment order for an account that has received a direct deposit of federal benefits during the 60 days prior to the garnishment order (most benefits pay at least monthly), the bank must keep a portion of the account available for the account holder’s use. The amount the bank must keep unfrozen is the the monthly government benefit deposited into the account or the account balance, whichever is less. For instance, if a debtor receives $600 a month from his Supplemental Security Income payment, and he has $1,000 in his bank account, then the bank must keep $600 unfrozen. However, if he has only $400 in the bank at the time of the garnishment order, then the entire account must be kept open for the beneficiary’s use. The new regulations would release banks from liability for following the new rules, and would slightly change the way benefit payments are coded upon deposit so that it will be easy to tell if a garnished account receives federal benefits.
The proposed regulations are open for public comments until June 18th, and will probably be revised prior to being finalized. To read the proposed regulations, click here.