The coronavirus crisis is causing severe financial pain across the U.S., where tens of millions of people have lost their jobs and filed for unemployment benefits in just the past month. For those who have lost income, a federal stimulus check could be vital to their financial well-being right now.

Unfortunately, many people who were already having money troubles before the COVID-19 pandemic hit are now running into a new challenge with their stimulus payments. Debt collectors are rushing in to try to grab up those stimulus checks in order to satisfy people's past debts. Because of the way that lawmakers set up the stimulus check program, what those debt collectors are doing appears to be legal -- but it also threatens to undermine the entire point of the program, which was to rush cash to hard-hit Americans so that they could cover their current expenses during this crisis.

Person wearing balaclava mask holding beige bag, framed in a camera view.

Image source: Getty Images.

Despite the best of intentions

The Treasury Department has worked hard to try to get stimulus money to people rapidly. For those who included direct deposit banking information with their 2018 or 2019 tax returns, the Treasury is using that data to send stimulus payments directly into people's bank accounts. For most people, that's the fastest way to get the money where it needs to go.

However, millions of people owe certain kinds of debt for which creditors can garnish bank accounts. That includes just about any type of debt on which collection proceedings have advanced far enough for creditors to get a court judgment. When debt collectors present banks with garnishment orders, banks follow procedures that often include freezing accounts. To regain access to their funds, banks require account holders to provide proof that the money that's come into the account is somehow exempt from garnishment. Most people in debt don't know how to respond effectively to such demands even in the best of times -- let alone when they are stuck in their homes, when bank branches are closed to the public, and when courts aren't functioning at anywhere near normal capacity.

Lawmakers could have specifically designated the stimulus payments as exempt from garnishment or debt collection proceedings. However, they didn't include such clear provisions in the CARES Act, which leaves the matter up to legal interpretation. That ambiguity set the stage for debt collectors to act -- and they're acting quickly.

Fixing the problem

Now that they've identified the problem, legislators at the state level are working fast to address it. State laws govern much of the legal framework around debt collection, so in some states, those receiving stimulus checks already had some protection. Other states are moving to pass emergency legislation that exempts the stimulus payments from debt collection proceedings.

Congress could also take action, although it might be difficult for it to do so quickly enough to make a difference. Passing a federal law that reclassifies stimulus money into the same category as other exempt payments would offer everyone across the nation protection.

What you can do

If you're already aware that your bank account might be subject to a garnishment order, there are some things you can do to try to protect yourself. They include:

  • Having your stimulus payment sent to a different bank account. Often, garnishment orders will apply to all bank accounts, but if you know that debt collectors have only identified one of your accounts, then having your stimulus money deposited into an account at a different institution might protect it.
  • Getting a physical stimulus check. The IRS is seeking banking information for many Americans through its Get My Payment tool, with the goal of expediting those stimulus payments. However, if you anticipate problems, getting a physical check and cashing it will help keep it from getting locked up in a frozen bank account.

With the coronavirus pandemic wreaking havoc on all our lives, the last thing any of us need is for our stimulus checks to get taken away. If you think debt collectors might be looking to take your stimulus payment, don't wait for lawmakers to help you out -- do what you can to protect yourself and your finances.