Closing the Benefits Loophole (excerpts from The Wall Street Journal)

A bipartisan group of legislators is pressing the Treasury Department to close a loophole that has allowed banks to seize Social Security and disability benefits from customers’ accounts despite federal rules intended to protect these benefits from creditors.

The loophole also has enabled some banks to seize from customers their recent $250 Economic Recovery Payments, payments to disabled veterans, and supplemental benefits to impoverished individual from the Social Security Administration.

Federal law says creditors can’t take Social Security, disability, veterans’ and children’s survivor benefits to pay a debt.  But the federal law doesn’t say how money deposited directly into bank accounts is to be protected –a gap that has given banks the ability to seize such funds.

A U.S. Bancorp spokeswoman says the bank is legally required to honor garnishment orders; it’s up to the customer to work it out with the creditor and the court.

Under the proposed Treasury regulations, banks would be forbidden from freezing accounts that contain direct deposits of exempt funds, and couldn’t take fees from exempt funds if the fees are a result of a garnishment.  If the funds are commingled with nonexempt funds, the banks would have to apply a formula to exclude the protected amounts.  The rules would protect banks from lawsuits from debt collectors and account holders.

But the Treasury hasn’t released the proposals.  Now, legal-aid lawyers say Social Security recipients are bailing out of the direct-deposit program to protect their benefits from the banks.

Steps to protect your Social Security, disability, veteran’s or pension benefits:

·         Don’t commingle Social Security and exempt benefits with nonexempt funds.

·         Don’t get a loan or credit card from the bank where your Social Security or pension is deposited.

·         If sued, go to court and demand proof of the debt.

·         If your bank account is frozen, file an exemption claim within 10 days.

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