If you're living primarily or solely on Social Security benefits and you're being pursued by creditors, the law is on your side. Social Security benefits -- as well as Supplemental Security Income benefits, veterans benefits, federal employee and civil service retirement benefits, and other federal payments -- are specifically exempt from seizure.
There's one catch, however. Let's say you have your Social Security check deposited into your checking account every month. The collection agency comes along and instructs the bank to comply with a court order and hand over your funds. How does your bank know that your entire account balance comes from Social Security benefits and is exempt from being seized?
Before 2011: The bad old days
Before May 1, 2011, the banks weren't generally required to keep track of which money came from Social Security benefits and which money came from other income such as other pensions, wages, and dividends. If a collector wanted to seize your money, it was up to you to either prove which money was exempt or try to get back your money if it had already been seized.
If the bank wasn't sure how much of an account was available for seizure, it might have frozen the entire account until the account holder proved how much of the balance should be protected.
You can just imagine how well that worked out. For people dependent on federal payments for rent, food, and other basic necessities, having accounts frozen or seized could be disastrous. Worse, many elderly people and others receiving federal payments were not in the best position to know their rights or take action to regain control of their money.
Various states enacted laws to protect people from having their federal benefits seized. However, the laws varied from state to state and could be confusing.
New laws protect your benefits
Federal regulations that went into effect on May 1, 2011 changed all of that. Banks and other financial institutions can no longer automatically freeze accounts as a result of garnishment orders. They must first examine the accounts to make sure electronically deposited federal benefit payments are protected and remain available for your use.
Here's how the rules work:
- The federal government inserts an electronic "tag" on all direct deposits of exempted payments.
- If your bank receives a court-ordered garnishment, it reviews your account within two business days and determines whether you have any federal payments that are exempt. The bank cannot freeze or garnish those payments.
- Your bank -- not you -- bears the responsibility of identifying and exempting all tagged deposits made during the two months prior to the receipt of any garnishment order.
- The bank has three days from the date it receives the garnishment order to provide you with the name of the creditor, the date of the garnishment, and the amount of both protected and nonprotected assets in your account.
Be sure to use direct deposit
Your Social Security benefits and other federal payments are exempt from garnishment, whether you receive a check in the mail or have your benefits deposited directly into your account. However, the bank is not required to identify or exempt your funds if you don't have them deposited electronically. That doesn't mean that the money can be garnished, of course; it only means that you're left to prove where the money came from and that it is exempt.
This shouldn't be an issue for many people. Since March of 2013, the Department of the Treasury has required that most people receive Social Security or Supplemental Security Income payments electronically.
Keep your benefits separate with the Direct Express Card
One way to be sure your benefits are protected from garnishment is to use the Direct Express Card. This is a prepaid debit card on which you can have your payments deposited. You then take it to the store and use it like any other debit card or use it to pay bills or get cash.
You don't need a bank account to use the Direct Express Card.
Exceptions to the rule
These rules won't help you to avoid paying child support or taxes. These two expenses are in a class by themselves, and your Social Security benefits can be garnished to pay them.
You should also be careful transferring your Social Security benefits from one account to another. The bank has no way to keep track of federal benefits once you transfer them to another account.
The bank only tracks your exempt deposits for the last two months. If you have money in your account from previous months, it may be frozen or seized unless you tell your bank or the court that the money is exempt.
If you are on a limited income and dependent primarily on federal payments, and a creditor tries to take money from your bank account, the law is on your side. Knowing your rights and how to preserve them can help you get through difficult financial times without undue stress and loss of your essential income.
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