Greater Garnishment Protections Proposed

June 14, 2010

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

Rules proposed by five federal agencies would significantly increase protections from debt collection practices of freezing bank accounts that contain exempt Social Security and other protected federal benefits.  75 Fed. Reg. 20299 (April 19, 2010). Although State laws allow account holders to assert their rights to exemptions, the accounts may remain frozen until the challenges are resolved, causing extreme hardship to beneficiaries.  [Note that some states such as New York already have more bank account protections that may be more generous.  See July 2008 edition of the Disability Law News.]

The proposed rules would provide limited access to funds while a garnishment order is being challenged. Comments on the notice of proposed rulemaking (NPRM) are due by June 18, 2010. The NPRM only addresses payments made by direct deposit, not by checks.

Led by the Department of the Treasury, and joined by the Social Security Administration (SSA), the Department of Veterans Affairs, the Railroad Retirement Board, and the Office of Personnel Management, this rulemaking effort would require all financial institutions receiving a garnishment order for an account containing directly deposited federal benefit payments to conduct a review to determine whether any such payments were deposited to the account within 60 calendar days prior to the garnishment, known as the lookback period.

If so, the proposed rules would require the financial institution to allow the account holder to have access to any deposits made within the last 60 days. These funds are called the “protected amount.” Keep in mind that the protected amount is not the same as the amount of funds that may be ultimately exempt from garnishment. The rules provide that a benefit recipient may challenge the entire garnishment order; the protected amount simply represents the basic amount that will be available to a beneficiary to allow a lifeline while any further challenge is being pursued. There is an exclusion from this process if the United States is the creditor seeking to collect a federal debt.

If the individual has multiple accounts, the review and protected amount applies to each account. The financial institution must notify the account holder of the protections from garnishment that apply to exempt funds. This notice must be sent within two business days of completing the account review. The notice would also be required to contain other information, including notice of the right to claim exemption of additional amounts above the protected amount. A model notice is included with the proposed regulation.

The Agencies are asking for comments on the definition and effects of the proposed lookback period. Some advocates have identified problems with the 60 day lookback period, which was intended to protect the last two cycles of benefits payments for beneficiaries. The shortfall with the 60 day period occurs in months with 31 days; to cover a full two-month cycle of payments, the proposed 60-day lookback period should be increased to at least 62 days to cover this situation,

The proposed rules would enable financial institutions to identify federally exempt direct deposited funds by use of an easily identified code letter for payments originating from the Federal government, and a published list of entry details from each Agency originating the payment. Other provisions prohibit “continuing” garnishment orders, converting them into a one-time garnishment order. The rules would also restrict collection of garnishment fees in excess of the protected amount.

While the proposed rule is a great improvement over current practice, there are several significant gaps in its coverage. For example, the proposed rule does not address the problem of financial institutions setting off overdrafts and other debts of the account holder against exempt funds. Similarly, the rule does not protect exempt funds from bank fees, other than garnishment fees.  The rule contains no procedure for early release of directly deposited exempt funds in excess of the protected amount that may have been deposited more than 60 days before. And, as noted, the 60 lookback period may be inadequate to provide two months worth of benefits as intended.

The Empire Justice Center is planning to submit comments on the proposed rule. Please let us know if you have any thoughts that you would like us to consider in formulating our comments.

And stay tuned for future developments, including how these regulations, if promulgated, will interface with New York’s recent statutory changes.