New Federal Rule: Garnishment Protection

A new rule protecting certain federal benefits from garnishment became effective May 1, 2011. The regulation, titled, Garnishment of Accounts Containing Federal Benefit Payments, is important because it will help protect the elderly and disabled, among others, who receive federal benefits from having that money taken from their checking or savings accounts by creditors.

What is Protected?

Federal law protects certain types of Federal benefits payments from creditors. These include Social Security benefits, Supplemental Security Income (SSI) benefits, VA benefits, Federal Railroad retirement benefits, Federal Railroad unemployment and sickness benefits, Civil Service Retirement System benefits and Federal Employee Retirement System benefits. Under Federal law, these types of funds are protected from garnishment by judgment creditors.

What is Garnishment?

If a creditor successfully sues a debtor to collect a debt, it will be awarded a judgment. A judgment creditor may be able to try to collect the judgment by taking or “garnishing” money from the debtor’s bank account. State and federal laws restrict garnishment, and some income—the types listed above, for example—are protected. In most cases, a creditor must first get a judgment before garnishing funds, though there are some exceptions, such as student loans.

Why is This Rule Needed?

Financial institutions who receive a garnishment order often place a freeze on the debtor’s account, and may send the garnished funds to the court or creditor. That may include money that should be protected. The debtor is then left without access to the funds needed to pay essential bills, and must then try to prove which money in the account that was frozen or taken is exempt.

What the New Regulation Does

A financial institution that receives a garnishment order will now be required to review the debtor’s account history during the previous 60 days. If, during this ‘‘lookback period,’’ one or more exempt payments were directly deposited to the account, the financial institution must allow the account holder to have access to an amount equal to total benefits received during that period, or the balance of the account on the date of the account review, whichever is less. Financial institutions will also be required to provide account holders with a notice of their rights.

To help financial institutions identify which funds are protected, there will be a tracking code attached to direct deposits of certain federal benefits. Benefits payments received by check are not covered by this regulation because they can’t be identified using these tracking codes. While those funds are still protected from garnishment, recipients may run into the old problem of having their accounts frozen first, and trying to assert their rights later.

This regulation does apply to accounts that are jointly held with someone else, and it also applies to multiple accounts, if a debtor has more than one account with a financial institution.

What It Doesn’t Do

It does not protect funds from garnishment to collect child support or money owed to the U.S. government. It doesn’t protect all benefit payments that may be exempt, such as military retirement payments, and certain payments made by the Army, Navy, Air Force, Marines, Coast Guard, National Oceanographic and Atmospheric Administration and the Public Health Service. (That may change in the future.)

It also doesn’t protect funds that have been transferred from one account to another. If, for example, a debtor’s Social Security check is deposited into his checking account, but he later transfers that money to a savings account, this regulation no longer protects it. (Again, the funds may still be exempt from garnishment, but the debtor may find himself with his account frozen, trying to prove that the funds should not be garnished.) And it only protects sixty days’ worth of direct deposit benefits payments.

What You Should Do Next

If you receive income from federal benefits and are having trouble paying your bills, be sure to get help. Talk with a consumer law attorney or bankruptcy attorney to find out how to protect your money and assets, and resolve your debts. If a debt collector threatens to garnish income received from any of these protected sources, such as Social Security income, talk with a consumer law attorney immediately. The debt collector may be breaking the law.

Image: Kevin Cortopassi, via Flickr.com