Certain federal benefits, such as Social Security and Veterans benefits, are protected against garnishment by creditors. Unfortunately, for years when banks have received notice of garnishments, they have routinely frozen the accounts, even though some of the money in the account came from these government sources, and as such, should still be available to the person holding the bank account.
But, after a rule issued by the Treasury Department earlier this year, that should all change. Under the new rule, when banks receive notice of a garnishment order from a creditor or debt collector, before they can freeze the account, they must first determine if any of the money in the account came from a direct deposit from a federal source in the last two months. If so, the bank cannot freeze that money, although any additional money in the account can be frozen and eventually awarded to creditors.
Federal benefits protected by the new rule include those from:
- Social Security
- Supplemental Security Income (SSI)
- Department of Veterans Affairs
- Federal Railroad retirement
- Federal Railroad unemployment and sickness
- Civil Service Retirement System
- Federal Employee Retirement System
There are certain exceptions to these protections. The new rule does not protect these federal benefits from child support orders or when the federal government is the creditor, such as an order to pay back taxes. The new rule only covers deposits made electronically (i.e. direct deposit) and does not cover funds that are subsequently transferred to another account. Although the account holder is still entitled to the federal funds in these instances, the bank is not required to keep them unfrozen and it may be some time before the individual will have access to them.
Older Americans, particularly those living on Social Security or Veteran’s benefits, will benefit the most from the new rule. Those whose income consists mostly of federal benefits are sometimes considered “judgment proof” by debt collectors because their income comes from these protected federal sources. Yet many have had to deal with the frustration of having their bank account frozen before the rule took effect. Despite being judgment proof to a certain extent, bankruptcy for the elderly has become an important method of stopping creditor harassment once and for all.
The new rule should provide additional protection to Americans who receive federal benefits. With people regularly living into their 80s or 90s, declaring bankruptcy in one’s 60s still allows plenty of time for a person’s credit crating to improve, while eliminating debt and permanently stopping creditor harassment. Whether your 20 or 60 years old, if you are receiving federal benefits and harassing phone calls from creditors, an experienced Orlando bankruptcy attorney can explain your options and obligations.