A new U.S. Department of Treasury rule will be welcome news for retirees, veterans and persons with disabilities.  Since May 1, 2011, when the new rule took effect, the people who receive  federal benefits will be much safer from garnishment by creditors.

The Rules

Prior to the new rule, a creditor could not garnish the federal government in order to “intercept” the payment of Social Security, or similar federal benefits, to a debtor.  However, in the past, each state has had different rules for what happened after the debtor received benefits and deposited them into his bank account.

In Michigan, the funds were “safe” from garnishment by a creditor if the funds were directly deposited into an account and not commingled with any other funds.  But banks did not always check to see if that was the case. Instead, the bank might “freeze” the debtor’s entire bank account for 14 days to allow the debtor time to file an objection with the court. Sometimes the bank just used the “safe” funds to pay the creditor under the garnishment without checking at all. This could result in bounced checks or insufficient funds for the debtor to withdraw to pay his bills.

What's changed?

The new federal rule makes the procedure the same in each state. The federal government will now put an electronic “tag” on all direct deposits of “safe” payments.  The bank will have two days after it receives a garnishment from a creditor to determine which federal payments are “safe”. The bank cannot “freeze” these amounts or pay them to a creditor.  In addition, the bank must protect all “safe” deposits made during the previous two months. For example, if a debtor gets a monthly Social Security payment of $800, then the new rule automatically protects a total of $1600 from a garnishment.  That amount is protected even if all of those funds are not from the direct deposit of a government benefit.

As in the past, these federal benefits can be garnished to pay a federal tax lien or for overdue child support. The new rule does not change that.  However, it does offer peace of mind for debtors that face garnishment of their federal benefits from other creditors.

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