If you're in or nearing retirement, then there's one thing you need to know about your Social Security benefits. That is, if you get them directly deposited into your bank account, then those funds are automatically protected from creditors.

Protecting your benefits from garnishment
The issue here relates to garnishment. This is a way for creditors -- say, a credit card company -- to either seize a portion of your paycheck or, in the event you're retired, to freeze your bank account in order to collect past-due debts.

Let's assume, for instance, that you've racked up $20,000 in overdue credit card charges. If the credit card company decides to do so, and they oftentimes do, then it could ask a court to freeze the funds in your bank account(s) and/or require your employer to redirect a portion of your earnings to pay off the debt.

An important exception to this is your monthly Social Security check. Namely, unless a creditor's claim is for child-support payments or past-due federal taxes, then a retiree's Social Security benefits, at least for the past two months, are theoretically protected.

I say "theoretically" because this presents a problem for banks if they're not directly deposited. And, just for the record, this isn't because banks are biased against you. It's rather simply a matter of logistics.

When a bank receives a garnishment order, its initial duty is to determine whether or not the order stems from a failure to pay child support or federal income taxes. If it does, then your account is automatically frozen -- Social Security benefits and all.

However, if it relates to anything else -- again, say, a credit card debt -- then the bank must review your account history from the past two months to determine whether or not any of the funds therein are protected, such as Social Security benefits.

If they are, then only the excess is subject to garnishment. This leaves an amount equal to two months' worth of benefits available for you to use as you deem fit irrespective of any court order.

The importance of direct deposit
Herein lies the importance of having your Social Security benefits directly deposited, as that's the only way a bank can automatically determine if they're a protected source of funds and thus immune to garnishment.

According to consumer advocates, more than 1 million low income Americans have their Social Security and other federal payments improperly frozen each year as a result of such orders.

For the bank this is merely a clerical error. But for the unwitting victims, the net effect is to leave them temporarily destitute.

There's no getting around the fact that this is an unjust tragedy. But there's also no getting around the fact that it's easy to avoid such a fate so long as your Social Security benefits are enrolled in direct deposit.