Friday, September 9, 2011

Federal Rule Protects Exempt Bank Funds from Garnishment

On May 1, 2011, a new federal rule went into effect.  The new rule increases protection for exempt funds in a garnished bank account.  It had become commonplace for banks, upon receiving a garnishment order from a judgment creditor to freeze the account of the judgment debtor 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.  Under the new Treasury Department rule, an electronic tag will 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.  The rule does not apply to military retirement or state issued benefits.   

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.  Garnishment orders obtained by the United States are not covered by this regulation.

While the new rule is a step in the right direction there are gaps in its coverage.  Setoffs are not covered by the new rule.  This means that a financial institution can still obtain these “exempt” funds to set off overdrafts and other debts owed to the financial institution such as credit card debt.  The rule also does not apply to bank fees.  The 60 day look-back period is being criticized as well.  In some instances when there are 31 days in a month, only one month’s worth of benefits will be protected.

Garnishment orders affect more than 1 million people each year according to the National Consumer Law Center.  Many of these people are often elderly and on a fixed income.  A frozen bank account can cause these people significant hardship forcing them to go without needed medicine or food.  This new rule is just one of many powerful consumer protection laws currently in effect designed to help people in need.  The new rule applies to all federally chartered federal and state banks and credit unions.  Exempt funds must be electronically deposited to be tagged as exempt.  Deposits made by paper checks are still exempt, but the bank is not obligated to identify these funds or protect them from garnishment. 
  
The interim final rule may be reviewed at http://edocket.access.gpo.gov/2011/pdf/2011-3782.pdf.  Guidelines issued by the Department of the Treasury, Financial Management Services, may be accessed at www.fms.treas.gov/greenbook/guidelines_garnish0311.pdf.

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