Plan Aims to Keep Debt Collectors Away From Your Social Security

The Obama administration on Wednesday proposed rules aimed at closing a legal loophole that debt collectors have used to seize Social Security and veterans' benefits from bank accounts.

The Treasury Department and other agencies published the proposed new rules on garnishment, or seizure, of government benefits in the Federal Register, opening them to a 60-day public comment period.

Federal law has long protected Social Security and veterans benefits from most creditors, with a few exceptions for child support, alimony, unpaid federal taxes and debts to other federal agencies. But creditors have been seizing the payments anyway by getting court orders to freeze and garnish bank accounts that receive the federal benefits through direct deposit.

The lack of clear rules for banks has resulted in the freezing of many accounts containing federal benefits, creating an unfair hardship for beneficiaries who rely on them every month, officials say.

The issue has gained urgency in recent years as more people get their federal benefits deposited directly into their bank accounts. More than 80 percent of the nation's 51 million Social Security recipients get their payments through direct deposit.

Consumer advocates say many people who receive Social Security or veterans benefits can't afford to have their bank accounts frozen for even a short period of time, and it's hard to hire a lawyer to get your money back when all your resources are frozen.

Under the proposed rules, banks that receive garnishment orders for their customers' accounts would be required to review the accounts to determine whether they received deposits of federal benefits in the past 60 days, and in what amount.

The goal is to give financial institutions clear rules concerning garnishment orders and a safe harbor against liability, a Treasury official said Wednesday. He spoke on condition of anonymity because he wasn't authorized to speak publicly on the subject.

In the current situation, garnishment orders don't always provide sufficient information for banks to know whether an order is subject to an exception allowing seizure of federal benefits, according to the background information on the proposal published in the Federal Register.

As a result, many financial institutions have believed they weren't able to evaluate the amount of funds in an account that is sheltered from garnishment, and that trying to do so could expose them to liability. That left the recipients of the benefits having to go into state courts to make the case for exempting their federal payments, the Federal Register filing says.

Social Security benefits are the primary source of income for 64 percent of people aged 65 or older, according to the government.

"If their accounts are frozen, these individuals may find themselves without access to the funds in their account unless and until they contest the garnishment order in court, a process that can be confusing, protracted and expensive," the filing says.

Lawmakers from both parties have been pressing the Treasury Department for years to close the loophole with new rules, and last spring the administration promised action.

Several senators swiftly praised the move on Wednesday.

"This rule clarification will ensure that banks can no longer stand between seniors and their rightful benefits," Sen. Herb Kohl, D-Wis., chairman of the Senate Special Committee on Aging, said in a statement. "We're glad to see this administration prioritize the protection of beneficiaries."

Kohl and other lawmakers introduced a bill last year that would stop further promotion of the direct deposit programs for Social Security and veterans' benefits until the Treasury issued rules to shelter the benefits from creditors.

Over a 12-month period in 2006-2007, an estimated $178 million was garnished from bank accounts that included a mixture of Social Security benefits and other deposits, according to the Social Security Administration's inspector general.