NCLC Resource – Protecting Against Creditor Seizure of Stimulus Checks
- April 9, 2020
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The consumer heroes at the National Consumer Law Center have issued the following resource to help consumer protect their corona stimulus checks from levy and seizure by heartless and unscrupulous debt collectors:
“The CARES Act authorizes payments up to $1200 to individuals and $2400 for couples, with an additional $500 for children under 17 years old. The payments phase out for those whose income is between $75,000 and $99,000 ($150,000/$198,000 for a married couple filing jointly). An eligible family of four with children under 17 will receive $3400. Social Security recipients who do not file tax returns will only receive $1200 as the IRS does not know which recipients have dependents. It is unclear whether recipients will have an opportunity to provide dependent information in order to obtain the higher payment.
The U.S. Treasury will start issuing stimulus payments as early as April 9th to income-qualified Americans. Payments will first be made electronically to individuals who provided direct deposit information in their 2018 or 2019 tax returns. Social Security recipients and railroad retirees who are not required to file a tax return and did not file a return for 2018 and 2019 will receive stimulus payments in the same way they receive those benefits—in almost all cases either through direct deposit to their bank account or loaded onto their Direct Express prepaid card.
More information on payment plans and eligibility criteria is available and is being regularly updated at https://www.irs.gov/coronavirus.
The Threat to Families’ Stimulus Checks
Certain creditors may view stimulus payments as an opportunity to seize money for amounts owed on outstanding court judgments. Millions of Americans have court judgments against them—often issued many years ago by default without the consumer’s knowledge. These consumers may not realize that they are potentially subject to bank account seizure, including the immediate loss of a stimulus payment.
Creditors may be lining up to obtain court garnishment orders to seize stimulus deposits and any other amounts present in the bank account, up to the amount of the garnishment order. In some states, a previous garnishment order may still be in effect that obligates the bank to review the account for a period of time. Unless the federal government, state governments, or the courts direct otherwise (see below), banks that are presented with a garnishment order are likely to freeze amounts in the account and give the consumer a short time to prove in court that account funds are exempt from seizure—a daunting prospect at any time, and a near impossibility today when many courts are at least physically closed, people are ordered to stay at home, and attorneys are inaccessible.
For most consumers, there is no magic bullet to avoid bank account seizure. Many approaches to minimize such seizures have drawbacks that are better to avoid if payments are not actually at risk of being seized. These are complex issues that consumers may not want to make on their own. This article provides factors an attorney should consider in advising clients about the risk and how to avoid the loss of their stimulus payments to judgment creditors.
Are There Special Limits on Judgment Creditors’ Garnishment of Stimulus Payments?
The CARES Act protects stimulus checks from certain offsets to collect debts owed to federal and state governments. The Act does not address private creditors’ seizure of the checks from bank accounts to satisfy outstanding court judgments. While advocacy efforts are ongoing to change that situation, this article assumes that they will not be successful, at least before the first set of payments is distributed.
Consumers may have protections they can, in theory, invoke under state law, after they receive notice that their bank account has been frozen. Depending on the state, consumers can claim funds in the account are exempt, for example under exemptions for “public benefits,” deposits up to a certain dollar amount, or a “wild card” dollar amount. See NCLC’s Collection Actions Appendix G (now open to all readers even without a subscription through May 3, 2020). But in a frustrating situation with constitutional due process implications, with courts closed to most business and consumers unable to reach the courts in any event, consumers may not have an opportunity to raise these rights.
In a very few instances, state or local governments have issued emergency orders to stop all or some garnishment orders and are considering orders to declare payments as exempt public benefits or other protections, which could be an important way to protect consumers if other states follow their lead. Orders are being issued and changed on a day-by-day basis, and both NCLC’s COVID-19 web page and NCLC’s Major Consumer Protections Announced in Response to COVID-19 are attempting to track the latest developments.
As of this writing, examples include Massachusetts emergency regulation 940 C.M.R. 35.00 and a Las Vegas, Nevada order of Justice Court, effective March 17, 2020. Relieving consumers of the need to contest garnishment orders could have public health benefits and would prevent widespread violations of consumers’ constitutional due process and other legal rights, as explained here.
Determining If a Bank Account Is Subject to Garnishment
Many Americans do not know their bank account is at risk of seizure because they do not realize a default judgment has been taken out against them in a collection lawsuit. Even where a consumer’s creditor is announcing debtor-friendly policies because of the COVID-19 epidemic, the creditor may have already sold to a debt buyer its rights to enforce the court judgment against the consumer or may have sold the debt after default to a debt buyer that obtained a judgment against the consumer. In either case, the debt buyer is unlikely to be so considerate. Here are clues to tell if a stimulus payment will be garnished:
- • Has the consumer’s bank account been garnished before—consumers are supposed to receive notice after a garnishment. If the garnishment does not satisfy the judgment, the bank account may be at risk for additional seizures?
- • Has the consumer ever lost a court lawsuit or had a judgment entered against them?
- • Has the consumer ever been served legal papers relating to a suit, but the consumer did not respond?
- • Call up the bank holding the consumer’s deposit (when it is possible to get through to them) to ask if a continuing garnishment order will seize new money coming into the account.
- • A credit report from the major reporting agencies no longer includes information about court judgments against the consumer, but other data aggregation services should collect and be able to provide this information.
- • Determine how long a garnishment order lasts in the state and whether courts or other applicable officials are issuing new garnishment orders during the COVID-19 emergency.
Strategies for At-Risk Direct Deposit Recipients
Those receiving stimulus payments by direct deposit could receive them as soon as April 9th. How soon this money can be seized by a judgment creditor depends not only on the state law where the consumer banks, but also the state laws where that bank has other branches or its main office (e.g., New York).
Immediate garnishment may occur as soon as April 9th where state law allows a garnishment order already delivered to the consumer’s bank before the direct deposit to remain effective on a continuing basis through the date of direct deposit, though we understand that only a few states allow such continuing garnishment orders. Other pre-existing garnishment orders may have a continuing life for a certain number of days, but have expired prior to April 9th, requiring the creditor to obtain a new order.
It is possible that creditors may have obtained new garnishment orders that they have not yet served. We have heard some reports that creditors are seeking such orders. It is unclear to what extent creditors are able to access the courts during this emergency to obtain these orders. Some courts may be open electronically but some may be fully or partially closed and not issuing garnishment orders or issuing them slowly. If a bank account is at risk of a new garnishment order that has not yet been served on the bank, the consumer has some time to move the stimulus payment out of the account to prevent seizure.
Starting April 9th, at-risk consumers should monitor their accounts and consider moving all money out shortly after it arrives (or even moving other money out earlier). Consumers should consider withdrawing the funds in cash or transferring the funds electronically or through a debit card payment to pay for necessary goods or services. If it is safe to access an ATM, many banks are waiving their daily limits on ATM withdrawals.
Another option that may reduce but will not eliminate the risk of garnishment is to move existing funds and seek direct deposit of the stimulus payment into a prepaid card or bank account at a smaller bank or credit union. Creditors are less likely to serve garnishment orders on smaller institutions. Prepaid cards are not exempt from garnishment, but most are issued by smaller institutions that are not on the radar screen of debt collectors. (See below for special issues involving the Direct Express card.)
These actions may, however, make it more difficult for consumers to use their funds or cause them to pay prematurely for bills that should be delayed. Whether to move funds from a bank account will be a difficult decision, in large part based on how real the risk of garnishment is if they are left in the account.
One step attorneys should take is to determine if a certain amount of funds in a bank account is exempt from garnishment under state law. New York and possibly other states make protection automatic and do not require consumers to take action to protect those funds. Many other states have protections that consumers must invoke after a garnishment order is served. See NCLC’s Collection Actions Appendix G (now open to all readers even without a subscription through May 3, 2020) for a particular state’s exemptions. See also the analysis of state bank account exemptions in NCLC’s No Fresh Start in 2019. If the account is automatically protected (in other words, the exemption protection is self-actuating, such as in New York), leaving the protected amount in the bank account should be safe.
If there are exemptions that are not self-actuating and the account has been frozen pursuant to a garnishment order, the attorney can seek the release of the exempt funds. The stimulus payments may be exempt because state law protects a certain dollar amount in the account or may exempt as “pubic benefits” or “public assistance benefits,” or pursuant to a “wild card” amount that can be used to protect any of the consumer’s property.
Furthermore, attorneys should consider filing preemptive actions before a garnishment order is served, as a state’s procedures allowing the consumer to raise exemptions only immediately after a bank account is frozen should not apply during the COVID-19 emergency. Such procedures in the current circumstances violate constitutional due process. Due process allows garnishment only if the consumer has an immediate opportunity to raise defenses after a freeze or seizure. See NCLC’s Collection Actions § 13.5. It will be a factual question, with courts mostly closed during the COVID-19 emergency, whether there is in fact an immediate opportunity to raise those defenses. If not, any bank freeze should be viewed as wrongful and a violation of due process.
Special Strategy for At-Risk Social Security, SSI, and VA Beneficiaries
A special strategy for those at risk of garnishment is available for recipients of Social Security, SSI, Veterans, or certain other federal benefits. A U.S. Treasury rule exempts from garnishment an amount in a bank account or Direct Express card equal to two months of federal benefit payments for that individual. See NCLC’s Collection Actions § 14.5.4.
The protected amount in a consumer’s account need not be traced to the federal benefits—that dollar amount is protected no matter its source. If two months of federal benefits for a Social Security recipient is $2000, their account will be fully protected from garnishment if there is only $800 in the bank account before the stimulus payment is deposited. Once the $1200 is deposited, the total amount is less than $2000. Before the next Social Security or other benefit payment is deposited, however, they will need to withdraw additional amounts to keep the new balance under $2000. Fortunately, benefit payments come on a predictable date each month, such as the second Wednesday of the month.
This strategy comes with a cost, as described above, since it may be more convenient and safer to keep all funds in the bank account than to rush to withdraw cash or make payments from the account.
Should Consumers Provide Their Direct Deposit Information to the IRS or Wait to Receive Stimulus Payments by Paper Check?
For many millions of Americans, the Treasury Department has no information how to pay them electronically and will be sending a paper check unless the consumer provides their information via the new Treasury web portal. As described below, paper checks offer an opportunity to avoid garnishment. But, if Americans switch to direct deposit via the Treasury web portal, receipt of the stimulus payment will be sped up by weeks or even months. Paper checks also may be sent to the wrong address, otherwise lost, or stolen. Consumers may incur check cashing fees and be subject to check scams. Waiting months for payment, recipients may also be victimized by predatory lenders offering cash up front in return for the stimulus payment—with interest rates of hundreds of percent.
Strategies to Avoid Garnishment for Those Receiving Paper Checks
For paper checks, until the check is deposited into a consumer’s account, their attorney has some time to determine the risk of a garnishment order and also whether under state law a certain dollar amount in the account is automatically protected.
If there is a risk of seizure, recipients of paper stimulus checks can avoid garnishment by cashing them and not depositing them into their bank accounts. The consumer’s bank may be willing to confirm that there is no garnishment order and to cash the check immediately. Grocery stores or other merchants may accept the checks and provide cash back that can be saved or loaded onto a prepaid card. Where a creditor knows the consumer’s regular bank account, the risks of garnishment can be reduced, but not eliminated by opening up a new account at a small local bank. Watch out though for extra bank fees for this additional account.
Friends or relatives may be willing to provide cash in return for endorsement of the check to them, but they may face significant problems depositing an endorsed check into their account. Already banks are concerned about extensive fraud involving stimulus paper checks and will be very cautious about depositing them into someone else’s account. A bank may either refuse or request a hold on the funds in a friend’s account.
Clients should be warned about expensive check cashing companies. If other means of cashing the check are unavailable, the risk of bank account garnishment must be weighed against the high cost of the check cashing.
For More Information
The Internal Revenue Service (IRS) has more information online about distribution of stimulus payments checks.
State-by-state summary of exemption laws: During the month of April 2020, NCLC is making a summary of each state’s exemption laws available to the public without a subscription from NCLC’s Collection Actions Appendix G.
NCLC’s Treatise Section on Bank Account Seizures: For detailed legal rights concerning bank account seizures and freezes, see NCLC’s Collection Actions § 14.5.
NCLC’s Major Consumer Protections Announced in Response to COVID-19: survey of recent federal, state, and corporate actions to protect consumers during the state of emergency. See https://library.nclc.org/major-consumer-protections-announced-response-covid-19.
NCLC’s web page on COVID-19: recommendations and consumer protection actions concerning COVID-19. See https://www.nclc.org/special-projects/covid-19-consumer-protections.html.ShareFacebookTwitterMeet the author
Lauren Saunders is Associate Director at the National Consumer Law Center and manages the Washington, DC office, where she directs NCLC’s federal legislative and regulatory work. Lauren is a recognized expert in various areas, including small dollar loans, fintech, prepaid cards, credit cards, bank accounts, and consumer protection regulation. She is the lead author of Consumer Banking and Payments Law, contributes to Consumer Credit Regulation, and has authored several reports and white papers. She previously directed the Federal Rights Project of the National Senior Citizens Law Center; was Deputy Director of Litigation at Bet Tzedek Legal Services; and was an associate at Hall & Phillips. She graduated magna cum laude from Harvard Law School and was an Executive Editor of the Harvard Law Review, and holds a Masters in Public Policy from Harvard’s Kennedy School of Government and a B.A., Phi Beta Kappa, from Stanford University.”