New Regulations Prevent Debt Collectors From Seizing Federal Benefits Deposited Into Bank Accounts

The Treasury Department and the four major benefit agencies, the Social Security Administration, the U.S. Department of Veterans Affairs, the Office of Management and Budget, and the Railroad Retirement Board, are jointly releasing new rules which prevent banks from seizing Social Security and other federal benefits from customers facing debt collectors. The new rules would protect Social Security benefits, Supplemental Security Income benefits, Veterans Administration benefits, Federal Railroad retirement benefits, Federal railroad unemployment and sickness benefits, Civil Service Retirement System benefits and Federal Employees Retirement System benefits.

Current federal law prohibits creditors from taking Social Security benefits to recover a debt, but the law does not protect benefits once they are deposited into bank accounts. Banks that receive garnishment orders from debt collectors generally freeze customers’ accounts. This triggers overdraft, bounced-check and other fees that the bank then withdraws from the customer accounts, which has included Social Security and veterans benefits. Customers often don’t know they can file a claim to get their funds released; even when they do, the process can take weeks or months.

The proposed new rules, published on April 19th in the Federal Register at 75 FR 20299, will require banks that receive garnishment orders to review the accounts to see if they have received any direct deposits of federal benefits within the past 60 days. If so, they must establish a protected amount equal to the sum of the benefits deposited. So, if the person had two deposits of $1,000 each, the protected amount is $2,000, even if the person had spent the benefits. Under these rules, the banks and credit unions wouldn’t have to worry about whether benefits money is co-mingled with other deposits, or if there is a co-owner on the account. Any amount above the protected amount would be handled according to the garnishment rules of each state. The rule doesn’t prohibit states from establishing a higher protected amount.

Financial institutions that follow these rules would be protected from lawsuits from creditors or account holders. The rule allows the financial institution to collect the customary garnishment fee, typically $100, but it can’t take the fee from the protected amount. Banks can continue to take overdraft and other fees from the protected amounts, however. The regulation would also require financial institutions to send a notice to the account holder detailing what happened, how much has been protected, and how much frozen, with information on how to contact the creditor, the court and the bank.