Last year, new federal garnishment laws went into effect. The latest in a series of new federal regulations is intended to protect credit card holders and those whose banking accounts are susceptible to freezing and seizure of the funds.
Banks and other financial institutions can theoretically no longer automatically freeze accounts that are subject to garnishment orders from state courts upholding such garnishment laws. Instead, the financial institutions holding the funds must examine those accounts to ensure electronically exempt funds will remain available to the account holders.
The Problem with Old Garnishment Laws
Formerly under most old state garnishment laws, a creditor of a successful lawsuit could obtain a court judgment ordering the seizure of assets held by a financial institution. Often, exempt funds were mixed in a banking account.
Social Security benefits, veterans benefits, federal employee retirement benefits, civil service retiree benefits, and benefits administered by the Railroad Retirement Board, all exempt benefits, are very often mixed in with other income and monies in both checking and savings accounts. In the past, successful creditors armed with judgment orders could have these accounts frozen and then seize what monies were owed regardless of what type of money they were seizing. This practice often hurt the American citizens who needed the money the most in order to live- the elderly, disabled, veterans, and retirees. They needed the funds for food, shelter, health care, and other basic needs.
It has been estimated that more than one million low income people each year, including those that were also credit card customers, received exempt funds that were improperly frozen or seized as a result of the old garnishment laws. The actions often rendered people depending on exempt funds poverty-stricken.
New Garnishment Laws Applies Only to Direct Deposits
The new garnishment laws applies only to electronic direct deposits. Under the new regulations:
- The federal government must insert an electronic “tag” in all direct deposits of exempted payments.
- When a bank receives a garnishment order from a court, it must review the debtor’s account within two business days and determine what — if any — federal payments are exempt under the new regulation. Those payments cannot be frozen or garnished.
- Banks are required to exempt all tagged deposits made during the two months prior to the receipt of any garnishment order and protect those deposits from garnishment. No longer will consumers be required to identify or help segregate payments that are exempt from garnishment.
- Within three business days of receiving the garnishment order, the bank must provide the debtor with the name of the creditor, the date of the garnishment and the amount of both protected and non-protected assets in the account.
- As in the past, amounts owed for federal taxes and in response to state child support agencies cannot be protected from garnishment — even if they come from otherwise exempted federal sources. In other words, even under this new regulation, your Social Security or federal pension payments can be garnished to pay for overdue federal taxes or for child support.
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