Social Security Benefits–Safe From Creditors? Your Own Banker?

The rule is simple. No creditor (other than the IRS) can seize your social security benefits for payment of debts. But does this mean your benefits are asset protected in all events? The good news is that for the most part your benefits are protected. A notice of levy served on the government to intercept the payments will be given no effect. However, what are the creditor’s rights if the benefits are direct deposited into a bank account? Social Security law states that the benefits cannot be reached by creditors…which is interpreted to mean the creditor cannot access the funds even after they are deposited in the recipient’s bank account. To insure maximum creditor protection, dedicate the bank account solely for receipt of social security benefits and do not commingle assets.

Unfortunately, there is a hidden danger lurking. Creditors will routinely garnish bank accounts as part of their collection procedure having no knowledge of whether the bank account contains social security benefits. When the account holder is given notice of the garnishment and advises the bank that the account consists solely of social security benefits, the bank will not turn over the assets. Indeed, if this was the end of it the system would appear to work. However, it is not the end…far from it. When the banks receive the garnishment order they immediately freeze the account.The bank often charges a processing fee for freezing the account as well as overdraft fees on checks that are bounced because the funds are frozen. The episode can add up to hundreds of dollars being taken by the bank even though the garnishment itself is ineffective.

The good news is that the US Treasury is promulgating rules to limit the fees a bank can charge under the circumstances described. Also, the banks will now be obligated to investigate whether the account has been the recipient of social security benefits within the last 45 days and, if so, will be prohibited from freezing the entire account. Perhaps something like $2,200 will remain available to the accountholder to pay her bills. While the rules will certainly improve things for debtors receiving social security, it remains an imperfect system when garnishments are ordered.