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Think Public Benefits are Exempt from Execution? Think Again.

posted by Nathalie Martin

I have been telling my students this for years. Perhaps you have too. 42 U.S.C. § 407(a) says social security and other public benefits are free from the claims of executing creditors, but for many people that is true only on the books, not in real life. Why the disconnect? Because right now, under current law and regulations, banks are under no obligation to check to see if the money in a bank account comes from social security or disability payments before allow a garnishment to go through. This is true even if the only funds in the account are wired there directly from the government and are marked SSI or SSA. In fact, banks say they must comply with any garnishment order, even if the funds are obviously exempt. Of course, they also make a bundle on all the fees that result from this shameless practice.

Section 407(a) is not worth the paper it's printed on because it is very hard for a consumer to undo the garnishment, as I recently learned. My cousin (a 67 year old woman with a disabled adult son, who has been through a horrible marriage and divorce, several minimum wage jobs since she had no work experience, a car breakdown, etc.) had her ATM refused.

She had been garnished by a credit card company, courtesy of one of those cavernous collections law firms with one attorney (if that) and about 100 paralegals. The firm had saved her bank account information from when she paid off another credit card company that also was a client of the firm. She did not know the second credit card company even had a judgment against her, and it took her a week to find out who garnished her because her bank wouldn’t talk, and this was done without notice. This is all legal by the way…..

Eventually at the firm's suggestion, she began faxing paperwork to the credit card company’s lawyers to "prove" the funds were SSI and SSA. They'd receive the fax, come up with some reason that the paperwork was insufficient, a page missing, a smudged entry, but never call back to tell her things were amiss. She’d finally follow up, and then she’d hear the next excuse. This went on for two more exasperating weeks. Finally, after much prodding (she was sure the account would be voluntarily released any day now), she sought legal counsel from a legal aid office, which seemed a bit overworked (obviously), and frankly a little peeved that she believed the credit card company’s lawyers were ever gong to release this. She was dressed down for being optimistic and trusting.

Five weeks after the garnishment, she finally got access to her "exempt" funds, having skipped needed medication, rent payments, insurance payments, and who knows what else. She would NEVER have gotten an attorney at all if I had not begged her to do so. She does not trust lawyers and had no idea how to find one even if she did want one. And, she had family to lend her money. Most people in this position don’t. The point is that things are worse than this for most people in her shoes, and many poorer people do not feel they have access to a lawyer. They are right in many cases. That is why it makes no sense to make the consumer prove the garnished funds are not SSI or SSA.

So, who knew? As it turns out, the exempt funds rule contained in Section 407(a) is all but worthless unless banks are required, at least in some obvious cases, to refuse the garnishment in the first place. That was the bad news. The good news is that, thanks to the National Consumer Law Center and Margot Saunders, the Senate Finance Committee is putting pressure on federal banking regulators to require banks to do the following after receiving a garnishment request:

1) look to see whether electronically deposited funds are exempt before allowing a garnishment to go through, and refuse the garnishment if all the funds are exempt, or

2) if there are commingled funds, apply FIFO or LIFO, and only allow the non-SSI/SSA funds to be garnished.

You can find out how to help move the process along by contacting Margot Saunders at the National Consumer Law Center, at [email protected]. Other thoughts or comments about how to get this change made (or just disagreeing or agreeing with my position) are very welcome.


Hmmm. Two posts down, Adam Levitin is writing about SSA's plan to replace benefit checks with prepaid debit cards. Should we be thinking about these two issues together, maybe? Adam is concerned, reasonably, about fees and their impact on both consumers and merchants. However, prepaid debit cards can't be garnished. That seems like a much more straightforward solution than imposing a new layer of decisions in the process of handling garnishments which is already an administrative headache for banks.

If all the money in an account comes from benefits, theoretically it's an easy call for the bank to say no to the garnishment. But I suspect that a very significant percentage of benefit recipients who have bank accounts are also receiving money from various other sources, such as wages, off the books self employment, child support and gifts/loans from family members. Whatever accounting rule is used to try to apportion the account balance will produce wildly inconsistent results depending on the vagaries of when the garnishment hits versus the timing and amount of various payments flowing into the consumer's account, versus other payments the consumer makes.

I hate to respond on principle, knowing reality stinks here, but the first key to economic prosperity in my view is becoming bankable. We should enforce the law in a way that allows people from the lower classes to gain access to traditional banking relationships (and credit) so they don't end up wth all thier money under the matress or within the reach of burglars and pickpockets, or, when the money's gone, at the door of payday lenders. Thanks for the thoughtful comment though. I definately think we should consider the two issues together.

This follows up my conversation with Nathalie at the AALS Debtor-Creditor Program. I will appreciate whatever light any of you you can shine on the debtor abuse I will discuss.

First, here follows the entry I wrote about judgment creditor garnishments of judgment debtor’s exempt Social Security funds in bank accounts for the current supplement of Doug Rendleman, Enforcement of Judgments and Liens in Virginia (2d ed. 1994). EJL-V § 3.6(A) p146 n. 126

[Add at the end of the note]
“Offensive and defensive initiatives against garnishments of exempt funds in debtors’ bank accounts are rapidly developing along several fronts. Two heartbreaking newspaper stories have been published about the hardship caused when debtors lose access to their exempt funds. Rob Johnson and Ray Reed, Observers Debate Banks’ Obligations in Garnishments, Roanoke Times, November 6, 2006 and Ellen Schultz, The Debt Collector vs. The Widow, The Wall Street Journal, April 28-20, 2007 at A1. The legal issues are complex, involving the debtor’s procedures in the lawsuit that led to the judgment, suits under state consumer-protection statutes, state torts like abuse of process, malicious prosecution and wrongful garnishment, and federal statutory actions.

“Judgment debtors have filed federal Fair Debt Collection Practices Act, or FDCPA, actions against judgment creditors’ lawyers and law firms. The FDCPA actions are at preliminary stages. Federal courts, including the Fourth Circuit, have rejected collection lawyers’ claims of immunity. Sayyed v. Wolpoff & Abramson, 485 F.3d 226 (4th Cir. 2007); Todd v. Weltman, Weinberg & Reis Co., 434 F.3d 432 (6th Cir. 2006), rehearing denied, cert. denied, 127 S.Ct. 261 (2006). In an interlocutory appeal in Todd v. Weltman, Weinberg & Reis, above, the federal court of appeals, in addition to rejecting the immunity claim, refused to approve abstention and declined to give absolute witness immunity to the affidavit stating a reasonable belief that the debtor’s account contained non-exempt funds. A federal district judge denied a law firm’s motion for judgment on the pleadings: the debtor alleged that the law firm’s "false and misleading" affidavit stated a reasonable belief that the debtor’s bank account contained non-exempt funds; the court denied the defendant’s motion because the debtor alleged a FDCPA cause of action for an "unfair or unconscionable" debt-collection technique. Lee v. Javitch, Block & Rathbone, 484 F.Supp.2d 816 (S.D. Ohio 2007). Our final FDCPA debtor who sued a law firm was unsuccessful because the citation that the law firm sent to the bank sought only the debtor’s non-exempt funds. Beler v. Blatt, Hasenmiller, Leibsker & Moore, 480 F.3d 470 (7th Cir. 2007). Such a bank is probably not off the hook, however.

“Plaintiffs alleged that the New York garnishment procedure freezing exempt funds electronically deposited in bank accounts violated the Supremacy Clause and the Fourteenth Amendment’s Due Process Clause. In denying defendants’ motion to dismiss, the judge had found that plaintiffs had sufficiently alleged defendants’ violation of the Due Process and Supremacy Clauses under “color of state law.” In the reported decision, the judge declined to certify defendants’ interlocutory appeal. Mayers v. New York Community Bancorp, Inc., 2006 WL 2013734 (E.D.N.Y. 2006).”

Second, the legal aid lawyer who has spark plugged this issue with me is Henry Woodward. Please share with Henry henry-at-laserv.org. His testimony last September before Senator Baucus is valuable. And he convinced a trial judge in Franklin county to hold garnishee Wachovia Bank in contempt.

Third, Alan Myers, a second-year Washington and Lee student, is working on a Note on these improper garnishments to submit to the Washington and Lee Law Review. Henry, who teaches a course here at Washington and Lee, is working with Alan. Alan’s e-mail is myersa-at-wlu.edu.

Thanks in advance for any help you can provide.

Doug Rendleman
Washington and Lee
January 7, 2008

Our sister inlaw walked out of her home and left it owing a $65,000 mortgage. She went through chapter 7 about a year ago but agreed to pay the mortgage. She says her lawyer told her just to leave the house if she didn't want to pay for it. We don't believe that she was told this. Is she headed for trouble? Thanks

Two points in response to FJP's comment.

First, there is no reason why prepaid debit cards can't be garnished. If they are auditable (and most are, to accommodate lost or stolen cards), there are no technical or legal obstacles to garnishing them.

Second, FJP's concern with commingled accounts is real. Tracing rules are dreck. (Civilian jurisdictions don't bother with them. American legal scholars blast them: Oesterle, Rogers, Walt & Sherwin, Gilmore, Dagan.) The proper legal solution is to make the bottom $5000 or so of a bank account un-garnishable (and un-setoffable) whatever the provenance of the account funding. Any balances over $5000 (or so) can be garnished down to $5000.

If you think about it, this doesn't redistribute wealth from creditors to debtors. It redistributes wealth from financial creditors to trade creditors--a common theme in bankruptcy law, and one with an easy efficiency justification. And it lets the debtors meet their monthly bills. And $5000 is probably too small for abuse by the wealthy deadbeats of the world.

Does anyone have caselaw or articles on banks seizing exempt funds (Social Security) to pay for overdraft fees or any type of bank charge????

Is anyone aware of any litigation pending relative to issue of freezing social security funds and whether statutory atty fees are available in wrongful garnishmment setting? thanks

Hello, I'm hoping someone can help me, help my mom. My stepdad just passed away from a recurring cancer and my 70 yr old mom can't afford the Trailer home they were buying and will have to move.

Also my stepdad took care of all the bills and had signed a loan with a bank for a monthly payment, nothing on the loan, no collateral, shes not going to be able to afford either, and didn't sign with him or it anyway, wasn't aware of it till he passed away.

We live in GA and she will be getting Social Security and Military survivors benefit. He was retired Army. Does anyone know or can someone direct us to the finding the info, if the bank or mortgage company can take her benefits or hold her accountable?

He didn't have a will of any kind.

Thank you for your help.

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