New Treasury Rule Closes Loophole to Protect Social Security Benefits from Seizure by Private Debt Collectors

Social Security Recipients Devastated by Bank Account Seizures

New Treasury rule closes loophole to protect benefits from illegal freeze

May 19, 2010

AARP Bulletin - Life is hard for Patricia Cole, 59, of Morris, Ala., and thanks to her bank, it recently got a whole lot harder. Cole, who is partially blind and raising three grandchildren alone, lives entirely on Social Security disability payments. But in March, her bank froze the account where those payments are deposited and sent all the money in it to a court handling an old debt of her son’s. Cole had to call in a lawyer and spent a month getting the funds returned.

In the interim, she bounced checks, racked up overdraft fees, took money out of her life insurance policy to pay her bills, and came dangerously close to losing her home to foreclosure—to the very same bank, BB&T, that had sent off her money to the court, making it impossible to pay the mortgage on time.

“It all made me kind of sick,” says Cole.

Her problems resulted from a seven-year-old debt owed by her son, whom she had added to her checking account last year when her husband died, so there would be someone able to pay her bills if she fell ill. He had never used the account, she says, and it contained none of his money, only her Social Security disability payments.

“It is the client’s responsibility to notify the court and have the court determine if the funds are indeed exempt and therefore notify the bank,” said Merrie Betbeze Tolbert of BB&T. “When the court ordered that the funds be held for garnishment, the bank had to comply with the court order. Once we were told of the circumstances, we decided to do everything possible to ease the situation for her, which included returning the overdraft fees.”

Tolbert also disputed reports from Cole and her attorney that the garnishment threatened Cole’s mortgage.

“The situation with Ms. Cole was resolved in less than a month,” she said. “Our mortgage clients are not subject to foreclosure for missing one payment.”

The case is complex, but here’s the bottom line: According to the law, Social Security retirement and disability benefits and veterans benefits are exempt from seizure by private debt collectors. But banks, claiming that they have no way of knowing where the money in an account came from, routinely freeze accounts containing federal benefits when they get a court order to do so.

To get their money back, people have to file legal papers and usually have to hire an attorney. In the meantime, checks bounce, fees pile up and problems compound.

But the exempt benefits in bank accounts would actually be protected if a new rule proposed by the Treasury Department becomes final, which could come within the year.

The proposed rule, "Garnishment of Accounts Containing Federal Benefit Payments," would require banks to review the deposits in an account before freezing it in response to a court order. The bank would have to leave the account holder at least the amount of federal benefits that had been collected in the previous 60 days, minus withdrawals.

Bankers are not unhappy with the proposal.

“It does appear to provide much needed clarity and certainty on what banks need to do to protect these exempt federal funds for customers,” says Tim Deighton, a spokesman for Regions Financial Corp., which operates 1,900 banking offices in the South, the Midwest and Texas.

As the Treasury continues its deliberations, seizures continue. Consumer advocates estimate that there have been tens of thousands of cases like Cole’s every month.

“In my experience this has been happening more and more in the recession,” says Charles Yow, a Birmingham, Ala., attorney who helped Cole get her money back and keep her home. “A lot of judgments that sat dormant for years are now being collected on as a way for banks and other creditors to offset other losses they had over the last few years.”

“AARP has long known this is a problem,” says Julie Nepveu, a senior attorney with AARP Foundation Litigation. “Anyone who has Social Security as their primary source of income, who also has a debt subject to garnishment, could be hurt by this practice.”

Cancer—and a frozen bank account

If the benefit protection rule had been in effect, it might have saved Floyd Morell, 58, of Fairhope, Ala., a lot of trouble. Morell lives off of an $800-a-month Social Security disability benefit. He was in the hospital for prostate cancer surgery when he received a notice that his bank account was about to be frozen because of an unpaid medical bill resulting from a previous bout with neck cancer.

With the freeze in place, he was unable to pay his bills or fill his prescriptions. His utilities were cut off. His bank, Regions Bank, charged him $300 in fees for freezing and for checks he later wrote overdrawing the frozen account.

“I was a big mess. I literally had to get out of bed with a catheter and go down to Regions [Bank] and beg them not to cut off my medicine money.”

After his case was featured in The Wall Street Journal and Morell got help from an attorney, his bank unfroze his account and refunded fees it said were related to the garnishment order.

Deighton of Regions Financial Corp. said banks have difficulty ascertaining the origin of funds in an account that a court has ordered frozen.

“In cases where funds in an account come from multiple sources, it’s impossible for us to know if they are from Social Security or from other places,” he said.

When it comes to freezing an account, he said, banks are bound to follow court orders.

But if a customer files an exemption claim with the court, and the court determines that funds are exempt, “we will unfreeze an account and reimburse any fees associated with the original garnishment order, as we did in Mr. Morell’s case.”

Michelle Weinberg, an attorney with the Legal Assistance Foundation in Chicago, disputes banks’ claims that they can’t figure out the origins of a customer’s money on their own. The origins of electronic funds are easily determined, she said:

“All they have to do is look at the computer and they could tell which funds are exempt.

“Instead, they immediately charge $100 to $150 as a fee for freezing the account. They start collecting a $35 bounced check fee for every single check.”

Consumer advocates contend that desire for fees is one reason why banks are so quick to freeze accounts.

All deposits going electronic

It is crucial that the issue of freezes be addressed, consumer advocates say, because the Obama administration is moving toward paying essentially all federal retirement and other benefits by direct deposit and other forms of electronic transfer. Paper checks, which can be turned into unseizable cash immediately, will be history.

Already more than 80 percent of Social Security recipients get their benefits sent directly into their bank accounts. Beginning in March 2011, new enrollees for Social Security and other federal benefits will be given no choice but to get their money through electronic transfers. People currently being paid by check will be shifted to electronic payments beginning March 1, 2013.

A bit of advice

As the Treasury continues considering the new regulations, benefit recipients can take action on their own to protect their benefit payments. They can withdraw their funds immediately as cash or proactively inform their banks that the money in their account is exempt. People who need to fight a seizure in court can find an attorney through their local legal aid programs, which are listed online by the Legal Services Corp.

As for Patricia Cole, she has another piece of advice: Think twice before you put anyone else on your bank account.

What About the IRS?

Social Security recipients should note that while their benefits are exempt from collection by private debt agents, they are not exempt from collection by the Internal Revenue Service to settle past tax debts. In fact, this happens automatically.

Social Security payments to folks who owe back taxes are typically reduced by 15 percent every month to cover an IRS tab. That can be a hardship for people who may have accumulated tax debts from small businesses years ago but who live hand to mouth now, says Howard Levy, a Cincinnati attorney.

The IRS has responded to these concerns, according to the agency’s taxpayer advocate program. Starting in 2011, the IRS will screen out taxpayers whose income is at or below 250 percent of the federal poverty level (below $27,075 for single households and $36,425 for couples). Their benefits would not be automatically reduced to pay old tax bills.

Protected Funds Not Off Limits to Seizure

Tactics Prey On Those Who Have Money Exempt From Debt Collection

September 27, 2007

CBS - Janet Yuhasz was injured two years ago, and now lives check-to-check on government disability.

“I started having difficulty keeping up with my bills,” she tells CBS News correspondent Randall Pinkston.

Debt collectors went after her, sending her bank a court order to freeze her account. She couldn't buy groceries and the bank charged her $150 a processing fee to freeze the account.

“When they placed a lien on your account, what did you think?” Pinkston asked.

“Well, first I got very angry, because I didn't know it was allowed to be done,” she said.

It turns out, in her case, it was not allowed. Social Security, welfare, disability and veteran's benefits are all exempt from debt collection.

“Those funds are considered exempt, because they belong to people who are fragile, who have a disability that prevents them from working,” says Tanya Douglas, Yuhasz’s lawyer.

Yuhasz eventually got the money back.

“But they did keep their legal fee of $150, I believe it was,” she said.

Consumer lawyers and advocates point to thousands of cases like Yuhasz's, where protected money is being seized electronically -- leaving the poor and the elderly with depleted accounts, bank fees, and bounced checks.

Pinkston Blogs: Frozen Assets: Holes In The Safety Net

Here's how it can happen. Debt collection firms send banks restraining orders for tens of thousands of delinquent debtors. The bank searches for any matching names in their database, and if they get a match, the account is frozen.

If deposits in the account are exempt from debt collection, it's up to the consumer to sort it out and the bank faces no penalty.

Nessa Feddis of the American Bankers Association says banks are caught in the middle.

“They have to obey a court order, there's no choice there, and they somehow have to determine which dollar came from which deposit,” she said.

But some banks do check an account's history to determine if funds are subject to seizure, or exempt, like Social Security.

Legal services lawyer Johnson Tyler says if one bank can do it, they all can.

“They have computer systems that are very sophisticated, and the idea that they can't figure out if an account contains Social Security, only Social Security, is preposterous,” Tyler said.

If your exempt account is frozen, consumer advocates say the best thing to do is contact your bank and find a lawyer.