Closing the Benefits Loophole
By ELLEN E. SCHULTZ
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 individuals 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.
More
- Read about the $250 Economic Recovery Payments.
- Read the letters from Sens. Herb Kohl and Claire McCaskill and from four House members to Treasury Secretary Timothy Geithner.
- See the bill proposed to withhold funding to promote banks' direct-deposit program until the Treasury takes steps to protect Social Security benefits.
- Protecting Your Social Security and Pension from Creditors
And when banks receive garnishment orders from debt collectors, they freeze customers' accounts and collect fees, including a charge to freeze the account, as well as overdraft and other charges -- all of which can be taken from Social Security benefits.
The Treasury and Social Security Administration, along with banking regulators, developed proposed regulations early this year that close the loophole. But the regulations are in limbo.
In separate letters in May to Treasury Secretary Timothy Geithner, members of the Senate Special Committee on Aging as well as House members including Barney Frank urged that the Treasury issue regulations to stop banks from freezing benefits and seizing fees.
In a recent hearing before being confirmed as the Treasury's assistant secretary for financial institutions, Michael Barr said one of his first priorities will be to issue "a joint regulation to solve the problem of account freezes and garnishment of exempt funds." Mr. Geithner wasn't immediately available for comment.
Closing a Loophole
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The children of Nicole Murphy, above, had their Social Security survivor benefits seized when a creditor garnished the account for the children's unpaid medical bills.
Some customers whose accounts are frozen often don't know their benefit money isn't supposed to be snatched.
Bank of America Corp. froze the accounts of Ellistine and Roosevelt Thompson, a disabled couple in their 60s in Macon, Ga., whose only source of income is from Social Security.
Because the Thompsons had no access to their money, they couldn't retain a lawyer. Bank of America turned over all the benefits, some of which they set aside for their burial, to a debt collector pursuing a debt from the mid-1990s.
The couple learned from a TV news program that creditors can't take Social Security benefits. They contacted Georgia Legal Services Program, which last year sued the bank seeking the return of the couples' money.
A Bank of America spokeswoman declined to comment on the case, saying the court had placed a confidentiality order on it, adding: "Banks are required by law to honor garnishment orders or risk being held in contempt. We freeze accounts because the law says we must when we receive an order to do so."
Closing the Loop
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.
In a related matter involving Bank of America, the California Supreme Court was expected to rule as early as Monday on a case involving whether banks can take Social Security benefits to pay overdraft and other fees, not related to garnishments. The case, filed on behalf of elderly and disabled Californians receiving direct deposit of Social Security, accuses the bank of violating a state law that bars banks from tapping Social Security benefits; the bank argued that federal law pre-empts the state law.
Bank fees for handling garnishment orders and freezing accounts can total hundreds of dollars, leaving the person in debt to the bank.
In April, for instance, U.S. Bancorp seized the Social Security survivor benefits of two children in Kalispell, Mont., when a creditor garnished the account for the children's unpaid medical bills (the family has no health insurance). The benefits are the family's primary source of income, following the death of the children's father in 2007.
Unaware that the account was frozen, the children's mother, Nicole Murphy, 32, used a debit card to pay for gas and groceries for Easter. Each purchase triggered an insufficient-fund fee of $37.50. When the children's account fell below zero, the bank debited a negative balance fee of $8 a day.
A lawyer with Montana Legal Services Association helped Mrs. Murphy unfreeze her account. But the bank again froze the account. On May 7, the U.S. Treasury deposited into the account a $250 Economic Stimulus payment, which the government sent to low-income households. But the payment was unavailable to the family because the account was frozen, and because the bank's fees had created a negative balance.
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. If money is determined to be exempt, the bank releases it and refunds overdraft fees, she says. After being contacted by The Wall Street Journal, U.S. Bancorp credited $674 in overdraft charges back into the Murphys' account.
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, according to a person familiar with the matter. 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.
Allene Bellendier, a disabled 70-year-old widow, used to have her Social Security benefit deposited directly into her SunTrust Banks Inc. account.
But she closed her account last year after the bank froze it twice. Though she was able each time to get the account released with the help of a legal-aid lawyer, the process took weeks, leaving her without money for food, medicine or mortgage payments. When her food ran out, she says, she searched the house for loose change and found a few dollars in a piggy bank she was saving for Christmas presents.
She had a heart attack and says she lost nearly $600 in penalties and fees to companies where she had bounced checks as a result of the hold. Mrs. Bellendier now has her granddaughter cash the check at Wal-Mart; Mrs. Bellendier buys money orders to pay her monthly bills.
SunTrust declined comment.
In May, legislators introduced a bill to withhold funding to promote banks' direct-deposit program until the Treasury takes steps to protect Social Security benefits.
"Until adequate protections are in place, the Treasury should not be promoting a payout system that puts seniors' and veterans' benefits at risk," says Sen. Herb Kohl (D., Wis.), one of the bill's sponsors.
Write to Ellen E. Schultz at ellen.schultz@wsj.com
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