The latest in a series of new federal regulations intended to protect credit card holders and other indebted Americans has kicked in, and this measure covers new ground: It offers aid and comfort to some of the nation's most desperate debtors -- those who face frozen bank accounts and, ultimately, seizure of the funds in those accounts.
As of May 1, 2011, banks and other financial institutions no longer can automatically freeze accounts that are subject to garnishment orders won by credit card companies, their representatives or any other creditor. Instead, banks, credit unions and similar institutions must examine those accounts -- and ensure that electronically deposited federal benefit payments are exempted from the garnishment order and remain available to account holders.
Among the federal payments that cannot be slapped into the deep freezer and later thawed and ladled out to creditors: Social Security benefits, Supplemental Security Income benefits, veterans benefits, federal employee and civil service retirement benefits, and benefits administered by the Railroad Retirement Board.
Protecting exempt funds The move is seen as a significant reform that will pre-empt inconsistent state rules and clarify procedures for banking institutions. Most importantly, it will end a practice that often left many of the nation's most debt-ridden and impoverished people -- including retirees, veterans and the disabled -- without even the minimal financial resources they needed for food, shelter, health care and other matters of basic subsistence.
Consumer advocates estimate that more than 1 million low income people each year, including hundreds of thousands of credit card customers, received Social Security and other federal payments that were improperly frozen as a result of garnishment orders. These actions often rendered such people temporarily destitute.
"We applaud the work of the Treasury Department and the other agencies to safeguard these essential benefits ...," said Margot Saunders, an attorney with the National Consumer Law Center, which represented Consumers Union, Public Citizen and 19 other consumer groups before the U.S. Department of the Treasury, which took the lead in crafting the new regulation.
"All too often, elders, veterans and disability benefit recipients who rely on these benefits for their basic needs have been unable to access them for extended periods because of creditor-imposed garnishment freezes," she said.
On the other side of the equation, the American Bankers Association, the trade group representing virtually all of the nation's banks, also expressed approval.
"The ABA supports adoption of the proposal," said Mark Tenhundfeld, a senior vice president of the association. "We recognize that the procedures that banks had to follow before the rule could result in very real hardships for some individuals, and so we support a rule that avoids those hardships by protecting the customer's access to funds."
Banks caught in the middle Put simply, garnishment is a last-ditch effort by a creditor to collect legitimate debts owed by consumers. If you become and remain delinquent in your payments, and if you fail to respond to a series of efforts by the creditor or its representatives to collect the amount due, the creditor can obtain a court order allowing it to "garnish" your account and seize your money.
Such garnishment orders generally come in two flavors: If you are earning a paycheck, the court can order your employer to divert a portion of your wages to the creditor. If you are not employed, the court can order your bank to turn over to the creditor some of the proceeds of your account.
Social Security and other federal payments that end up in your bank account have been exempt from court-issued garnishment orders for years, but those orders often produced inconsistent or overly broad responses by banks that found themselves between a rock (court orders won by creditors) and a hard place (account holders needing access to their money).
"On the one hand, a creditor, having received a court order entitling it to payment, expects the bank to comply with that order or risk incurring liability for the full amount of the judgment," Tenhundfeld of the bankers association said last year in a letter to the U.S. Treasury. "On the other hand, a debtor that receives benefits payments that are exempt from garnishment expects the bank to refuse to pay to the creditor funds that are presumably protected."
In the end, many banks and other financial institutions simply froze the entire account and then required consumers to prove that the funds -- or a particular portion of the funds -- in that account came from exempted federal sources and should not be and could not be frozen or seized.
The process of unfreezing an account could take weeks or even months, consumer advocates said, and usually required the assistance of an attorney. As a consequence, it often took a heavy toll on credit card holders and others who already were nearly at their wit's end.
"When the account is frozen, no money is available to cover any expenses for food, rent or medical care," the National Consumer Law Center noted. "Checks and debits previously drawn on the account, before the recipient learned that the account was frozen, are returned unpaid. Subsequent monthly deposits into the account will also be subject to the freeze and inaccessible to the recipient."
Vulnerable most impacted The NCLC offered several examples, including the case of Ethel Silmon of Montgomery, Ala. A disabled, 59-year-old widow, she fell behind on her credit card payments. Her bank account ended up getting hit with a garnishment order for $15,895.44. The only money in her account -- less than $1,000 -- came from her $889 monthly Social Security disability payments, funds that should have been exempted from the order but were frozen by the bank. It took her -- and a volunteer attorney -- about four weeks to sort it out.
"During the month without access to her money, Mrs. Silmon suffered severe anxiety attacks. She had to go to the food bank for food and had to rely on her doctors for samples of medicine," the Center reported. "She is still fearful that they will try it again and states that she cannot handle it if they do."
Attorneys and consumer advocates say the regulation that takes effect May 1 should go a long way toward preventing similar cases in the future. The new garnishment rules come in the wake of other recent federal efforts to protect consumers, including the staged phase-in of landmark credit card reforms and creation of the Consumer Financial Protection Bureau.
Applies only to direct deposits Importantly, the garnishment regulation applies only to electronic direct deposits. It does not apply to old-fashioned paper deposits of federal payments. Those deposits also are exempt from garnishment, but banks are not required under this regulation to identify or protect them. This should not pose much of a problem, given that 87 percent of Social Security recipients received their payments electronically last year, and the federal government is making electronic delivery mandatory for virtually everyone who receives federal payments.
Under the regulation:
- The federal government must insert an electronic "tag" in all direct deposits of exempted payments.
- When a bank receives a garnishment order from a court, it must review the debtor's account within two business days and determine what -- if any -- federal payments are exempt under the new regulation. Those payments cannot be frozen or garnished.
- Banks are required to exempt all tagged deposits made during the two months prior to the receipt of any garnishment order and protect those deposits from garnishment. No longer will consumers be required to identify or help segregate payments that are exempt from garnishment.
- Within three business days of receiving the garnishment order, the bank must provide the debtor with the name of the creditor, the date of the garnishment and the amount of both protected and nonprotected assets in the account.
- As in the past, amounts owed for federal taxes and in response to state child support agencies cannot be protected from garnishment -- even if they come from otherwise exempted federal sources. In other words, even under this new regulation, your Social Security or federal pension payments can be garnished to pay for overdue federal taxes or for child support.
Though both sides of the issue -- the banks and consumer representatives or attorneys -- had urged federal officials to tweak an early version of the regulation in various (and mostly minor) ways, everyone seemed pleased with the result.
"This rule is truly an amazing and wonderful thing ...," the National Consumer Law Center said in a written statement. "The Treasury Department has led a remarkable effort."
"The agencies have tried hard to strike the right balance," said ABA's Tenhundfeld. "While the rule will result in additional burdens for the banking industry, we believe the balance struck by the agencies is reasonable."