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Direct Deposit and Social Security: Not so Nice for Those who Owe

posted by Nathalie Martin

Jonathan Ginsberg posted an interesting article on the National Association of Chapter 13 trustees web site this weekend, that will be relevant to many of our readers as well. Social security is now requiring all beneficiaries to set up direct deposit, which means the resulted funds could become available to executing creditors if there are any funds from any other source in the account as well. You might recall my blog about this some time back, which contains cites to some of the relevant law.

As my previous blog explains, Federal law provides that Social Security payments are exempt from garnishment from civil creditors. If, for example, a credit card lender sues you and obtains a judgment, that creditor cannot ask Social Security to withhold funds from your government check. While these protections do not apply with equal force to the IRS collecting a tax debt or a creditor collecting child support, all other creditors are not to touch social security funds under any circumstances.

There is however, a rub. Under the applicable law, Social Security money (SSA) that is co-mingled with non-Social Security money may lose this special protection. Here is what Jonathan Ginsberg says recipients should do:

"Social Security recipients can protect themselves by asking their bank to create a sub-account that holds onl y SSA issued funds. No money other than SSA funds should ever be deposited into this account. This is especially necessary if the recipient has civil judgment creditors looking for a source of funds to levy against.

In my practice, I have represented a number of senior citizen clients who are living with tens of thousands of dollars in credit card debt, have no assets or equity in property, and who survive on Social Security only. In these cases I often discourage bankruptcy and instead write each creditor advising the creditor that my client is judgment proof with no source of funds that can be garnished.

At the same time I write the credit card company, I also draft a letter to my client’s bank, putting the bank on notice that it should not honor any garnishment because the sole source of funds is Social Security money. Often, however, I find that my clients are using their “Social Security” account as a regular bank account and they deposit other money, such as funds generated from a garage sale or a gift from a relative. I spend a lot of time explaining to my client that even a few dollars of co-mingled money may jeopardize the protected status of their Social Security bank account.

Now that many more Social Security recipients are entering the electronic banking world, I expect that more than a few will find themselves trying to get money back from a judgment creditor who found a co-mingled account. Sometimes, senior citizens choose to file bankruptcy for the peace of mind benefit, but often a Chapter 7 or Chapter 13 filing is not necessary – instead many creditors and collection agencies will write off your debt and close their files if you can show that you are judgment proof. If you are receiving Social Security money, I urge you to take time now – before a judgment creditor begins collection efforts – to protect your bank accounts."


This is interesting stuff, Nathalie, and certainly belongs in the Unintended Consequences Hall of Fame.

You write that "under applicable law," the commingled SSA funds may lose their protection. Can you expand on that a little bit?

Effective in early May of 2011, a new rule ( 31 C.F.R. Part 212) related to 42 U.S.C. 407(a)went into effect that supposedly helped protect comingled funds from garnishment by changing the default rules about who had to check to see where the funds come from. The NCLC worked hard on these regulations, but there are still loopholes. Bob, I will elaborate tomorrow, either here in comments or in a fresh new blog, part 2! :)

The way I understand the rule is that a bank is required to do an account analysis before executing a levy and protect any social security, VA, Railroad Retirement Act, or Office of Personnel Management benefits that were deposited over the two months prior to receiving the levy, whether or not they were co-mingled. Banks can be held liable if they release any protected funds.

Of course, any benefits in the account over two months would be fair game.

Also, while SS is no longer issuing checks, direct deposit is not the only way to receive benefits. Beneficiaries can opt to receive a "Direct Express" card, which is essentially a pre-loaded debit card. The recipient can then get a cash advance, free of charge, from the teller window at any bank that accepts MasterCard - something that should be advertised and enforced, as it is my impression that many banks seem to think they can add a fee for this service.

very helpful Truckstop. I will add a few tidbits tomorrow.

I've worked quite a bit on garnishments in Georgia. The new federal rules don't say that Social Security benefits lose their exemption if they are co-mingled or greater than the protected amount under the new rules. The debtor can still raise any additional exemption as they would before, for example in a garnishment proceeding. 31 CFR 212.8. The comments in the final interim rule support a debtor's right to raise greater exemptions than the new rules allow.

I think the banks' biggest coup was that the new rules do not give private rights of enforcement and the banks no longer have to trace funds moved from one account to another.

We have seniors with multiple accounts who clearly transfer their SSA benefits from account to account. However, those second accounts are being seized and seniors rarely know the process to raise the exemption in the garnishment.

I've done this for a lot of clients who live on SSA. The real problem is the gorilla in the room that can not be gotten around: the Feds themselves. SSA money is not exempt from garnishment by Federal agencies. For example, several years ago a man started a business using an SBA loan his retired parents cosigned. The business failed, the son defaulted, and now Mom (80 years old, a stroke victim, English is her second language) is finding her monthly check coming up 25% light courtesy a garnishment from the SBA. And I say to myself, "What a wonderful world."

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