Bankruptcy

New Consumer Protection at the Bank?

By guest-writer

A recent press release from the National Consumer Law Center highlights a new federal rule that, if not modified in the next two months, will take effect May 1st and should better protect the bank accounts of people receiving government benefits. Here?s what you need to know.

When Creditors Can?t Garnish Your Money

If you?ve ever filed for bankruptcy or been in serious debt, you may be familiar with the practice of garnishment, which occurs when a creditor collects money directly from your wages or bank account to cover a debt you owe.

• Current law protects certain funds: As federal laws now stand, creditors are prohibited from garnishing certain payments from the accounts of debtors (that is, people who owe them money). These funds include Social Security payments, disability payments, veterans? benefits and other benefits for low-income and disabled people.
• Current practice permits the garnishment: Despite the prohibition against garnishing such funds from bank accounts, it seems that many banks regularly freeze the accounts of customers whose creditors request a garnishment from the bank. While customers can have these funds unfrozen, doing so generally requires hiring a lawyer and can take time. During that time, these customers may not have access to the funds in their account that they need to make basic purchases.
• High monthly toll on the poor: Reports note that every month, as many as 100,000 Americans are victimized by this improper garnishment.
• Immediate action is essential: A recent New York Times Op-Ed piece notes that if customers do not act quickly enough to unfreeze their accounts, creditors may end up garnishing the funds regardless of the federal laws prohibiting such action.
• ?Uncertainty of origins of funds?: Apparently, banks have justified their freezing of accounts legally protected from garnishment by claiming that they have no way of tracking the origins of funds in any given account, and that if they were to ignore orders of garnishment, they could face legal repercussions.

The New Rule: Electronic Tags for Special Funds

The new rule, then (if it is not modified or struck down before May 1), will allow the government to electronically mark the money it deposits into beneficiaries? bank accounts. With such tags in place, banks should be able to easily identify which funds are eligible for garnishment and which funds are protected.

The National Consumer Law Center noted in a press release that the new rule is especially good news for retirees, veterans and Americans with disabilities, as their accounts tend to most often be the ones with the types of money in question.

Stay posted to the Total Bankruptcy blog to find out the latest updates and changes to this rule as the public comment period comes to a close.

Full post as published by The Bankruptcy Blog on March 16, 2011 (boomark / email).