In very recent years, Federal laws have been enacted to provide enhanced protection for certain exempt funds from Garnishment of your bank account. It had become commonplace for banks, upon receiving a garnishment order from a judgment creditor (person or entity you owe), to freeze the account of the judgment debtor (you) without regard to whether the account contained exempt federal funds such as Social Security. The result of this practice left many retirees with no income and unable to meet their basic needs.
Deposits from Government Agencies
Under these new laws, an electronic tag must be added to automatic deposits from government agencies. These funds include: Social Security, Supplemental Security Income (“SSI”), Veteran’s Administration benefits (“VA”), federal Railroad Retirement, federal Railroad Unemployment and Sickness benefits, federal Civil Service Retirement benefits and federal Employee Retirement System benefits and federally funded student loan aid disbursements.
Banks must now exempt all tagged deposits made during the previous 60 days and protect those deposits from garnishment. The account holder must have access to the sum of the deposits made within the last 60 days or to the current balance, whichever is lower. Even if there is exempt money co-mingled with non-exempt money, banks will not be held liable to creditors for refusing to garnish the tagged funds.
Deposits made by paper checks are still exempt, but the bank is not obligated to identify these funds or protect them from garnishment.
While these laws are a huge step in the right direction, there are gaps in its coverage. Military retirement is not protected, which I believe is a travesty. Conveniently, garnishment orders obtained by the United States are not covered by this regulation, which includes federal taxes and government backed student loan debt. Set offs by your bank or financial institution are not covered by the rule. This means that the bank or financial institution where you do business can still obtain these “exempt” funds to set off overdrafts and other debts owed that you owe to them, including vehicle loans, home loans, personal loans and credit card debt. The rule also does not apply to bank fees. It, also, does not include protection from child support or spousal support. The other major thing to remember is only 2 months or 60 days is protected, so if you allow more than that amount of funds to accumulate in the account, any amount above can and will be seized by the garnishment.
Garnishment orders affect more than 1 million people each year and many of these people are often elderly, on a fixed income and/or are month to month on their bills. A frozen bank account can cause these people significant hardship forcing them to go without medicine, food, or other necessities.
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Grant McNutt is a Managing Attorney at the Bond & Botes Law Offices in Florence and Haleyville, Alabama. He holds a Bachelor of Science from the University of Alabama, and a Juris Doctorate from the Birmingham School of Law. He has been practicing Consumer Bankruptcy Law since 1999. Read his full bio here.