We have dealt with this topic few times already. However, a new treasury rule, effective May 1, 2011, will provide more protection to recipients of federal benefits from garnishment of their bank accounts. How this would affect future bankruptcy filers. This is our main topic here today.
Garnishment and Federal Benefits: The Basics
We already had defined what is a judgment proof bankruptcy filers
We define a judgment proof person as someone who had lots of creditors (who had gotten judgment against him/her now) but his assets are protected because he/she is recipient of social security benefits or disability income. His compensation (it is not called an income here) are exempt from seizure from his creditors regardless of the fact that they had gotten a judgment against him. As you know, the creditors may have various ways to collect the judgment including a garnishment, however, this cannot be applied against a judgment proof creditors. Judgment creditors cannot grab funds which come from certain sources, including some types of federal benefits such as Social Security, Supplemental Security Income, veterans benefits, and a few others.
Although these types of funds cannot be seized by creditors, in practice, when banks got a garnishment order in the past, they often froze all funds in the account (up to the amount of the debt), without regard to whether the funds were protected from garnishment. This means the bank accountholder would not be able to access those funds for weeks or months. The account holder could object to the garnishment of the protected funds to prevent the bank from turning them over to the judgment creditor. But many people were unable to complete the paperwork and procedure to do so, and so lost funds that never should have been seized.
Let us see the New Rule: The Onus is on the Bank
The bank without investigation would put a freeze on these accounts. Now, the new rule puts the onus on the banks. Banks receiving garnishment orders must now determine if the bank account has protected federal benefits that have been electronically deposited into the account within the previous two months. Now, after investigation, If the bank discovers that there are protected funds, it cannot include those funds in the account freeze.
The Implication of the New Rule.
Federal benefits received and deposited in a bank account via paper check are not protected by this new rule. Nor are funds received (even if received electronically) more than two months prior to the garnishment order. However, the regular state procedures for challenging a garnishment order will still be available for these types of funds. Federal benefit recipients currently receiving paper checks should consider switching to electronic deposit of their benefits.