Creditors cannot garnish government benefits such as Social Security and disability payments, under federal law. But every month, more than 100,000 recipients of such benefits get hit with judgments against their bank accounts, according to the National Consumer Law Center. Though improper, these claims often go forward in many states because consumers don't know their rights or lack the means to fight in court.
But a new edict from the U.S. Treasury Department aims to curb such abuses by enlisting banks to help. Beginning this month, federal guidelines go into effect requiring banks with garnishment orders to calculate the amount of funds in an account that cannot be frozen or released to creditors.
Initially the banking industry complained about not having the means to figure out what balances are derived entirely or in part from federal benefits. But after some tweaks, the new rule has the tentative support of trade groups. "I think on the whole, the Treasury has done a decent job," says Cary Whaley, vice president of payments and technology for the Independent Community Bankers of America.
The rule covers electronic deposits of Social Security and federal disability funds, as well as benefits for veterans, retired federal employees and the unemployed. It introduces a new automated clearinghouse code that will be attached to direct deposits, making an audited review of protected funds "a breeze," says Whaley.
This doesn't mean low-income advocates and banks are completely in unison, though. Banks are often the very creditors making garnishment claims that ensnare benefits, and the industry has fought hard against provisions that would stymie collection efforts against accounts, says Margot Saunders, a senior attorney for the NCLC, which has pushed for curbs on garnishment actions the last four years.
Banks are also chaffing against fee restrictions for executing on garnishment orders that involve protected benefits. (They can still charge for unprotected funds). The fees typically range from $75 to $135 per incident, according to Saunders.
"When the bank receives a garnishment, there are costs associated with processing it, including employee time, check stock used to hold funds, and mailing costs for remitting funds to the court," Jeff Asher, a senior vice president of 1st Bank in Lakewood, Colo., wrote in a comment letter to Treasury in response to a draft proposal. "This relatively small fee is completely justified as the customer's mishandling of their financial affairs should not become the bank's cost to bear." Asher argues in the letter that banks could be forced to close some accounts of benefits recipients, given the potential risk of expenses from garnishment claims.
Despite such concerns, the American Bankers Association gave its support for the draft rule last year. "Our members understand the need" to help avoid any hardships for these customers, its comment letter said.
Banks' burdens pale in comparison to those of elderly or disabled people who cannot pay for food, medicine or rent when their accounts are improperly frozen, say advocates like Linda Cook, a senior staff attorney with the Ohio Poverty Law Center. In her state, consumers often face a catch-22: They have only five days to challenge a garnishment order before their accounts are frozen, but have to wait weeks for a required hearing due to crowded local court dockets.
"There's a lag time, obviously," says Cook. "You can have outstanding checks you've written that are now bouncing."
Under the new guidelines, banks will have two days after receiving a garnishment order to calculate the amount of protected benefits. They must look back at least two months in determining if the account received such funds.
The new federal guidance will help national and regional banks better navigate the confusing overlap of varying state laws on garnishments. In some states, institutions must freeze accounts the day after a claim; in others, like Pennsylvania, there is a blanket prohibition of garnishment against any accounts receiving federal benefits.
