New Protection Against the Garnishment of Exempt Funds

August 1, 2008

Author(s):  Kirsten Keefe & Gina Calabrese

Advocates across the state are pleased that the legislature has passed the Exempt Income Protection Act ("EIPA"), which will sharply limit judgment creditors' ability to  restrain bank accounts containing directly deposited Social Security and other exempt funds.  EIPA also prevents the first $1,716 of any account from being restrained and creates special procedures that, in most cases, will enable an accountholder to have their account released without the aid of an attorney and without going to court.  It is expected that the new law will virtually eliminate the problem of restrained bank accounts for low-income New Yorkers.  Consequently, legal service   providers should see a steep decline in the number of requests for assistance with frozen bank accounts.  If signed into law by the Governor, the bill will take effect January 1, 2009.  This article discusses the changes that EIPA will make to the current law governing restraining notices  imposed on individuals' bank accounts.

EIPA's Self-Effectuating Exemptions

Certain types of income are exempt and may not be taken to satisfy a debt, including a judgment.  Nevertheless, New York Civil Practice Law and Rules (CPLR) 5222 currently allows judgment creditors1 to restrain an account containing exempt funds and maintain the restraint until the accountholder is able to prove – typically, with bank statements and award letters – that money in the  account is exempt.  EIPA closes this loophole in New York law by adding a self-effectuating exemption: when a banking institution2 receives a restraining notice for a customer's account, a certain threshold of funds in the account will remain available to meet the accountholder's basic living expenses.  The self-effectuating exemption is the central feature of EIPA.  California and Connecticut are the only other states with similar laws.

If funds that are "reasonably identifiable" as "statutorily exempt payments" have been directly deposited into the account within the 45 days preceding the date the restraining notice was served on the bank, then the first $2,500 of the account is not subject to any restraint.  "Statutorily exempt payments" means any personal property exempt from application to the satisfaction of a money judgment under any provision of state or federal law.  They include, but are not limited to:  social security, including retirement, survivors' and disability benefits, supplemental security income  or  child  support  payments processed  and  received  pursuant  to Title IV-D of the Social Security Act;  spousal support; veterans  administration  benefits;  public  assistance; workers' compensation;  unemployment insurance; public or private pensions; railroad retirement; black lung benefits; college tuition trusts, and  life insurance.3  If the account contains $2,500 or less – as will be the case for the typical client of a free legal service provider – no funds are restrained and the restraining notice will be void.  A cost of living adjustment is provided in the bill so that the $2,500 amount will increase over time.  On April 1, 2012, and every three years thereafter, the Superintendent of the NYS Banking Department shall determine and publish the adjustment amount based on the change in the consumer price index.

For all other bank accounts, EIPA incorporates New York's wage exemption, based on the current minimum wage.  Specifically, for accounts not    receiving directly deposited statutorily exempt payments, the first $1,716 will be exempt.  If the account contains $1,716 or less (also typical of  legal services clients) no funds are restrained and the restraining notice will be void.  The protected amount is equal to roughly two months of income at the minimum wage rate (240 times the state minimum hourly wage rate) and reflects the existing exemption for wages currently found in CPLR 5231(b)(i).4  This amount will increase to $1,740 on July 24, 2009 when the minimum wage is next scheduled to increase, and will continue to rise with the increase in minimum wage.

Banks are prohibited from charging fees to accountholders if a restraining notice is void.  Any amounts in the account over $2,500 or $1,716,   respectively, will be restrained and presumably banks will be able to charge fees to accountholders for restraining these accounts.

EIPA Notices and Procedures for Claiming Exemptions and Releasing Frozen Accounts

EIPA adds a new section to the CPLR, 5222-a, which contains procedures for releasing frozen  accounts.  The EIPA procedures are triggered only when amounts in the account are actually restrained.  In many instances – virtually all instances for the legal services community – the account will not be restrained at all, so the accountholder will not need to invoke the procedures for releasing their account.  The procedures are similar to those in effect in California, Connecticut, and Minnesota.

When the judgment creditor's attorney (or in the case of an execution, the sheriff or marshal)5, serves a restraining notice on the bank, the attorney must include a copy of the restraining notice along with the statutory Exemption Notice and Exemption Claim Form.6  If any funds are actually restrained, the bank must send the Notice and Claim Form to the accountholder within two business days of receipt.  The Exemption Notice is a consumer information notice.  It explains to the recipient that their account has been restrained and that certain types of funds are exempt.  It also explains the procedures for releasing an account.  Note that it differs from the current Notice to Judgment Debtor in CPLR 5222(e) (which is slightly  revised by EIPA).7  The Exemption Claim form is a self-help form that the accountholder can use to have the remaining funds in an account released, if those funds contain exempt income. 

To release an account, the accountholder must complete the Exemption Claim Form, sign it under penalty of perjury, and mail or deliver copies to the bank and the judgment creditor's attorney within twenty days of the postmark on the envelope containing the documents.  (EIPA requires the judgment creditor's attorney to fill in both their own and the bank's addresses for return by the judgment creditor.)  The Exemption Claim Form advises the accountholder to include documents supporting the claim of exemption (and provides examples) to obtain a quicker release of the account.  If the accountholder does not complete and return the form within twenty-five days from the date sent, the account remains subject to the restraining notice or execution.

If the accountholder provides proof that all of the funds are exempt, the creditor's attorney must instruct the bank to release the account within seven days of the postmark on the envelope in which the Claim Form arrived.  If the funds are commingled – meaning, the account contains both exempt and non-exempt funds - the creditor's attorney must apply the lowest intermediate balance principle8 of accounting to determine which funds in the account are exempt.  Within seven days of the postmark, the attorney must instruct the bank to release whatever exempt funds are in the account.  EIPA specifically requires the creditor's attorney to act in good faith when the accountholder uses these non-judicial procedures for establishing that the funds are exempt.

The creditor may object, in good faith, to the accountholder's claim of exemption by moving pursuant to CPLR 5240, for an order to modify an  enforcement mechanism.  The creditor must serve the motion on the bank and the debtor within eight days of the postmark on the envelope containing the accountholder's completed claim form.  (EIPA specifically states that the creditor is not entitled to enlargement of time for service by mail otherwise provided by CPLR 2103.)  The creditor must serve the debtor at the address provided on the Exemption Claim Form.  The notice of hearing on the motion must be scheduled for seven days after service.  The burden of proof is on the creditor to establish that the funds are not exempt.  In its motion, the creditor must demonstrate a reasonable belief that the debtor's account contains non-exempt funds, and the amount.  The belief cannot be conclusory; the creditor must demonstrate a factual basis.  The creditor must include a copy of the executed Exemption Claim Form with its motion, which is prima facie proof that the funds are exempt. 

Within five days of the hearing, the court must issue its order stating whether or not the funds are exempt, and ordering appropriate relief.  The judgment creditor must serve the order on the banking institution and judgment debtor within two business days after the court issues the order.  If the judgment creditor objected in bad faith, the accountholder may receive actual damages, statutory damages up to $1000, costs, and attorneys fees. 

If the bank receives no objection from the judgment creditor within eight days of the date postmarked on the Exemption Claim Form returned by the debtor, or if hand-delivered, within eight days of delivery, the bank must release the account and the restraint is deemed void.  If the bank receives a creditor's objection/motion, it must retain the funds for twenty-one days from the date it received the objection, unless otherwise ordered by a court.  If that time expires without receipt of an order from the court, the bank must release the account. 

EIPA specifically provides that the creditor and debtor may, in writing, direct the bank to release funds in the account to the other party.  The law also provides that no portion of it is intended to limit a judgment debtor's rights or remedies under any other provision of law.  Finally, EIPA limits the number of restraining notices a judgment creditor can impose on a natural person's account to two per year.  This limit will avoid repeated restraints after a restraint is lifted, which may occur where the account contains wages or commingled funds.

The text of the bill can be obtained by going to the New York State Assembly or Senate websites and searching for bill number A8527 or S6203.  Members of New Yorkers for Responsible Lending (NYRL) will be monitoring implementation of the new law (provided it is signed by Governor Paterson), as well as its impact. 

Gina Calabrese is a Professor of Clinical Education and Associate Director of the Elder Law Clinic at St. John's University School of Law.  Kirsten Keefe is a Senior Staff Attorney with the Empire Justice Center.   

Footnotes

1. CPLR 5222 authorizes court clerks, judgment creditors' attorneys, and support collection units to serve a restraining notice.  For ease of reference, this article discusses only judgment creditors' attorneys, but the provisions apply to support collection units, as well.

2. "Banking institution" includes all banks, trust companies, savings banks, savings and loan associations, credit unions, foreign banking corporations incorporated, chartered, organized or licensed in NY, or with a branch in NY, and nationally chartered banks. Hereinafter, "banks" shall refer to all "banking institutions".

3. A chart of statutorily exempt payments can be found on Empire Justice Center's website at www.empirejustice.org.

4. This provision does not change the exemption in CPLR 5205(d)(2) for 90% of one's earnings over the last 60 days.  Although amounts over $1,716 would be restrained, the accountholder should use the self-help procedures, and, if necessary, go to court, to release any wages that may be frozen in the account.

5. EIPA's reforms also apply to executions against personal property and income executions under CPLR 5230, 5231, and 5232, which are carried out by marshals and sheriffs.  For the sake of brevity, the article refers only to judgment creditors' attorneys.

6. The Exemption Notice and Exemption Claim Form can be found on Empire Justice Center's website at www.empirejustice.org.

7. EIPA revises CPLR 5222(e) by (1) expanding the list of exempt income to include, among other things, the self-effectuating exemption for $2,500 and (2) adding language informing the accountholder that they can go to court to release their account, with brief instructions on what to do.

8. The lowest intermediate balance principle is an equitable doctrine used to determine an amount of exempt proceeds in commingled accounts.  It is based on the lowest balance that existed between the date of deposit and the date the creditor's interest in the account was established.  

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