Bankruptcy

Think Public Benefits are Exempt from Execution? Think Again.

By Nathalie Martin

I have been telling my students this for years. Perhaps you have too. 42 U.S.C. § 407(a) says social security and other public benefits are free from the claims of executing creditors, but for many people that is true only on the books, not in real life. Why the disconnect? Because right now, under current law and regulations, banks are under no obligation to check to see if the money in a bank account comes from social security or disability payments before allow a garnishment to go through. This is true even if the only funds in the account are wired there directly from the government and are marked SSI or SSA. In fact, banks say they must comply with any garnishment order, even if the funds are obviously exempt. Of course, they also make a bundle on all the fees that result from this shameless practice.

Section 407(a) is not worth the paper it's printed on because it is very hard for a consumer to undo the garnishment, as I recently learned. My cousin (a 67 year old woman with a disabled adult son, who has been through a horrible marriage and divorce, several minimum wage jobs since she had no work experience, a car breakdown, etc.) had her ATM refused.

She had been garnished by a credit card company, courtesy of one of those cavernous collections law firms with one attorney (if that) and about 100 paralegals. The firm had saved her bank account information from when she paid off another credit card company that also was a client of the firm. She did not know the second credit card company even had a judgment against her, and it took her a week to find out who garnished her because her bank wouldn?t talk, and this was done without notice. This is all legal by the way?..

Eventually at the firm's suggestion, she began faxing paperwork to the credit card company?s lawyers to "prove" the funds were SSI and SSA. They'd receive the fax, come up with some reason that the paperwork was insufficient, a page missing, a smudged entry, but never call back to tell her things were amiss. She?d finally follow up, and then she?d hear the next excuse. This went on for two more exasperating weeks. Finally, after much prodding (she was sure the account would be voluntarily released any day now), she sought legal counsel from a legal aid office, which seemed a bit overworked (obviously), and frankly a little peeved that she believed the credit card company?s lawyers were ever gong to release this. She was dressed down for being optimistic and trusting.

Five weeks after the garnishment, she finally got access to her "exempt" funds, having skipped needed medication, rent payments, insurance payments, and who knows what else. She would NEVER have gotten an attorney at all if I had not begged her to do so. She does not trust lawyers and had no idea how to find one even if she did want one. And, she had family to lend her money. Most people in this position don?t. The point is that things are worse than this for most people in her shoes, and many poorer people do not feel they have access to a lawyer. They are right in many cases. That is why it makes no sense to make the consumer prove the garnished funds are not SSI or SSA.

So, who knew? As it turns out, the exempt funds rule contained in Section 407(a) is all but worthless unless banks are required, at least in some obvious cases, to refuse the garnishment in the first place. That was the bad news. The good news is that, thanks to the National Consumer Law Center and Margot Saunders, the Senate Finance Committee is putting pressure on federal banking regulators to require banks to do the following after receiving a garnishment request:

1) look to see whether electronically deposited funds are exempt before allowing a garnishment to go through, and refuse the garnishment if all the funds are exempt, or

2) if there are commingled funds, apply FIFO or LIFO, and only allow the non-SSI/SSA funds to be garnished.

You can find out how to help move the process along by contacting Margot Saunders at the National Consumer Law Center, at margot.saunders@gmail.com. Other thoughts or comments about how to get this change made (or just disagreeing or agreeing with my position) are very welcome.

Full post as published by Credit Slips on January 05, 2008 (boomark / email).