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Creditors Taking Advantage of Loophole with Social Security Benefits and Bank Accounts

Federal law mandates that Social Security disability, veterans nor children’s survivor benefits can be taken by creditors to pay a debt. With that being said, federal law does not mandate anything after the check has been directly deposited into a bank account. Seeing a loophole, some creditors have drafted garnishment orders on these people’s benefits when their checks are directly deposited into their bank account.

Seeing a problem brewing, Washington has started taking action. The following is from an article in the Wall Street Journal penned by Ellen E. Schultz:

The Treasury and Social Security Administration, along with banking regulators, developed proposed regulations early this year that close the loophole. But the regulations are in limbo.

In separate letters in May to Treasury Secretary Timothy Geithner, members of the Senate Special Committee on Aging as well as House members including Barney Frank urged that the Treasury issue regulations to stop banks from freezing benefits and seizing fees.


In a recent hearing before being confirmed as the Treasury’s assistant secretary for financial institutions, Michael Barr said one of his first priorities will be to issue “a joint regulation to solve the problem of account freezes and garnishment of exempt funds.” Mr. Geithner wasn’t immediately available for comment.

In the story mentioned above, two bank representatives explained how when a garnishment order comes down that the bank’s hands are tied. If they do not execute the garnishment request, then they will be held in contempt. Stories like the one of a creditor garnishing funds from a children’s survivor benefit account over the Easter holiday are becoming much too common.

Schultz also offers 4 tips to protecting yourself and your bank account:

Steps to protect your Social Security, disability, veteran’s or pension benefits:

1. Don’t commingle Social Security and exempt benefits with nonexempt funds.
2. Don’t get a loan or credit card from the bank where your Social Security or pension is deposited.
3. If sued, go to court and demand proof of the debt.
4. If your bank account is frozen, file an exemption claim within 10 days

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