“Closing the Benefits Loophole”


The Wall Street Journal has posted an article about a group of legislators who are pushing for the Treasury Department to close a banking “loophole.” This loophole allows for creditors to automatically garnish funds, such as Social Security or disability payments, from debtors’ bank accounts.

Federal law says creditors can’t take Social Security, disability, veterans’ and children’s survivor benefits to pay a debt. But the federal law doesn’t say how money deposited directly into bank accounts is to be protected — a gap that has given banks the ability to seize such funds.

Ellen E. Schults, author of the article, says that banks freeze customers’ accounts when they receive notice from creditors to do so, and then charge fees for freezing the account and then overdraft fees. People often don’t know that their benefit money isn’t supposed to be seized.

The article mentions one particular case, an older,disabled couple from Macon, Georgia whose only income was from Social Security. A debt collector had their account frozen. They didn’t know their Social Security money wasn’t supposed to be garnished until they saw a TV show about it. They then contacted a Georgia law group who sued the bank to get the couple’s money back.

A Bank of America spokeswoman declined to comment on the case, saying the court had placed a confidentiality order on it, adding: “Banks are required by law to honor garnishment orders or risk being held in contempt. We freeze accounts because the law says we must when we receive an order to do so.”

The proposed bill would prohibit banks from freezing accounts with direct deposits from funds that are supposed to be exempt from garnishment. If that money is mixed with money that is allowed to be taken, the bank would use a formula to “exclude the protected amounts.” This would protect banks from lawsuits from debt collectors and consumers.

If you have had problems with protected direct deposit funds being garnished by debt collectors, feel free to contact us.

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