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Bank Freeze Problems Attract Attention

May 1, 2007

Author: Catherine M. Callery (Kate)| Louise M. Tarantino

Despite the protections afforded to recipients of Social Security and Supplemental Security Income (SSI) benefits by 42 U.S.C. §407 exempting benefits from creditors, advocates hear countless stories from clients whose bank accounts have been seized or frozen.  The plight of these clients and the dubious actions taken by their creditors and banks are finally receiving some well-deserved scrutiny.

Recent reports in both the Christian Science Monitor and the Wall Street Journal have highlighted the problems that arise when creditors seek to enforce judgments against Social Security and SSI recipients.  The March 21, 2007 article in the Christian Science Monitor - entitled “Direct deposit of Social Security checks: safe, fast - and disastrous” and available at - relates the story of a client of Johnson Tyler from South Brooklyn Legal Services.  At the encouragement of Social Security, she arranged for her disability checks to be directly deposited into her account, only to have her account frozen.  The story chronicles the nightmare the client faced as a result.

The article also summarizes attempts by the advocacy community to address this problem.  Johnson Tyler’s litigation challenging the New York law upon which banks rely to freeze accounts is cited, as is litigation in North Carolina.  [See the September 2005 Disability Law News for a summary of Mayer, et al v. New York Community Bankcorp, et al.]  Virginia attempted to alleviate the problems caused by seizures of exempt funds by amending restraining notices to prohibit banks from freezing accounts that contained only exempt funds.  The Virginia Bankers Association (VBA) met with court officials to argue that the change violated Virginia law. Virginia, however, has since reinstated the old forms.

As the Christian Science Monitor points out, the banks argue that they should not be put in the position of determining which funds should not be frozen.  But advocates note that the banks have a financial interest in restraining accounts, as the fees charged by the banking institutions are significant.  Some banks, however, such as New York Community Bank (NYCB) have implemented systems to protect Social Security funds from improper garnishment. NYCB checks to be sure an account does not contain exempt funds before freezing it.  According to John Fennell, NYCB vice president, the policy “has been effective in protecting depositors” and has not been a burden to the bank.

[Note:  other banks have also agreed not to seize accounts containing only exempt funds.  Johnson Tyler informs us that Banco Popular will not restrain a bank account containing only direct deposit Social Security/SSI provided there has been no other deposit activity in the account during the last 90 days. Additionally, Chase and Astoria Federal will not honor restraining notices when the account contains only direct deposit SSI/SSD.]

The front page article in the Wall Street Journal on April 28, 2007, entitled “The Debt Collector vs. The Widow,” similarly highlights the problems faced by several disabled social security beneficiaries whose supposedly exempt accounts were frozen.  The article, available as DAP #453, points out that Pennsylvania's Supreme Court recently issued a rule that barred banks from freezing accounts that contain only direct deposits of Social Security.  [To read the new rules, see]

The good news on the local front is that New York is considering new legislation modeled on a Connecticut statute that offers more protection to debtors with exempt funds.  Thanks to the hard work of members of New Yorkers for Responsible Lending (NYRL) and others, a new bill will be introduced by Assemblywoman Helene Weinstein.  Copies of the bill, along with the Connecticut statute and a comprehensive memo on other state laws, are available as DAP #454.  We’ll keep readers posted on the progress of the legislation.


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