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Protecting Public Benefits from Garnishment

posted by Katie Porter

 Mark Budnitz at Georgia State University College of Law, in coordination with the National Consumer Law Center, is asking law professors to sign on to a letter supporting a proposal by Treasury and other federal agencies to mandate crucial protection for persons receiving federal benefits such as Social Security. Regular Credit Slips readers may remember that guestblogger Nathalie Martin's post on this problem, "Think Public Benefits are Exempt from Execution? Think Again." Prof. Budnitz succintly describes the problem. He writes:

"These funds are exempt under federal statutes.  Congress intended the funds to be beyond the grasp of creditors.  Nevertheless, these funds are routinely frozen and seized by debt collectors. When a debt collector obtains a judgment, it serves a garnishment order on the consumer's bank.  The bank freezes the consumer's account; often the bank turns over the garnished amount to the debt collector without first giving the consumer any notice.  Most banks simply honor the state court order; they do not examine the bank account to determine whether the funds are exempt.  For consumers whose primary or sole income are federal benefit payments (e.g., Social Security, SSI, veterans benefits), the effect is devastating.  The consumer often first learns of the bank's freeze when checks start to bounce.  He or she has no money for food, medicine and other necessities.  The proposed regulation would correct this problem.  It sets out a clear, uniform procedure for banks to follow. It prohibits the freezing and the seizure of exempt funds."

    Over twenty law professors have already signed on to Budnitz's letter.  In addition to supporting the proposed regulation, it recommends a few improvements. If you are a law professor and you want to sign onto this letter, please contact Prof. Budnitz who will give you further information. Members of the public will be able to comment soon; instructions are here.


There are two problems with the underlying federal law. First, it relies on tracing reasoning--ascertaining the source of funds in a commingled account. For good operational reasons, banks find this difficult to do. And you can't blame consumers for not setting up the kind of segregated accounts that eliminate tracing inquiries.

Second, banks have stopped viewing garnishments as operational inconveniences, and now view them as profit centers. This has been exacerbated by foolish state court decisions such as All American Auto Salvage v. Camp’s Auto Wreckers, 146 N.J. 15, 679 A.2d 627 (1996) that allow a bank to assess fees for garnishments that come out of the account. This is bad commercial law, much less consumer law.

The proper solution would be to establish some minimum on consumer transaction accounts--$3000 seems about right to me, but ymmv--which is immune from all creditor process and bank setoff, and can only be decremented by third-party payments. This is operationally much easier than a tracing exercise, and far easier to enforce.

It would seem logical, in the case of commingled funds, to work backwards from the current balance, assuming all debits to be against the non-exempt balance when possible (and that all credits go to separate exempt and non-exempt balances, as appropriate).

I would guess that in most cases, it wouldn't be necessary to go back by more than a few months to show that had the customer maintained two separate accounts and always made payments from the non-exempt account when possible, the entire balance would be exempt funds. (For example, if I start the month with a balance of $2000, receive $3000 in exempt funds, and make $2500 in payments, then even if the entire starting balance was non-exempt, I could have made the payments against the non-exempt balance first, leaving me with a balance of exempt funds only.)

So the tracing exercise wouldn't necessarily be that complex. A fixed exemption would be simpler, but would still have problems; it would require, for example, that the banks coordinate to ensure that the customer doesn't have multiple accounts each under $3000 but with a total above the threshold.

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