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Separate savings from Social Security

Don Taylorq_v2.gifDear Dr. Don,
Under what circumstances can one's monthly Social Security benefit be withheld or diverted in whole or in part to pay a past debt? A "state of former residence" has already been paid what was to be my $250 economic stimulus payment and the debt still has a large balance.
-- Brad Benefits

a_v2.gifDear Brad,
This is an important topic and a bit controversial. The Social Security Administration has encouraged recipients to receive their benefits through direct deposit. But if benefits are co-mingled with other funds, the bank isn't responsible for differentiating between what can and cannot be garnished in the account. The Social Security Administration has limitations on garnishment, but its responsibility ends upon the payment of benefits.

Here's what the Social Security Administration says on the topic of garnishment on its direct deposit "frequently asked questions" page.

Can Social Security benefits be garnished by creditors to pay a debt?
Section 207 of the Social Security Act (42 U.S.C. 407) protects Social Security benefits from assignment, levy, or garnishment. However, the law provides five exceptions:

  • Section 459 of the Act (42 U.S.C. 659) allows Social Security benefits to be garnished to enforce child support and/or alimony obligations;
  • Section 6334 (c) of the Internal Revenue Code (26 U.S.C. 6334 (c)) allows benefits to be levied to collect unpaid Federal taxes;
  • Section 3402 (P) of the Internal Revenue Code allows beneficiaries to elect to have a percentage of their benefits withheld and paid to the Internal Revenue Service to satisfy their Federal income tax liability for the current year;
  • The Debt Collection Act of 1996 (Public Law 104-134) allows benefits to be withheld and paid to another Federal agency to pay a non-tax debt the beneficiary owes to that agency: and
  • The Tax Payer Relief Act of 1997 (Public Law 105-34) authorizes the Internal Revenue Service to collect overdue federal tax debts of beneficiaries by levying up to 15 percent of each monthly payment until the debt is paid.

The Social Security Administration's responsibility for protecting benefits against legal process and assignment usually ends when the beneficiary is paid. However, once paid, benefits continue to be protected under section 207 of the Act as long as they are identifiable as Social Security benefits using normal banking practices. For example, only social security benefits are deposited into a particular bank account.

If a creditor tries to garnish your social security check, inform them that unless one of the five exceptions applies, your benefits can not be garnished. You also may want to provide this same information to your financial institution and seek legal assistance if you believe it is needed.

NOTE: Supplemental Security Income payments cannot be levied or garnished.

The Office of the Comptroller of the Currency has a FAQ page titled "Answers About Garnishments" that discusses the bank's side of the equation. The following question and answer from that page gives you a plan of attack.

How do I find out if money in my bank account is about to be garnished and what should I do next?
Usually, you will get a letter or other notice telling you that a court has issued a garnishment order for money in your bank account. The notice usually will provide information about potential exemptions and tell you what to do if you think money in your bank account is exempt from garnishment. Remember, the court and your creditor may not know if money in your bank account is exempt unless you tell them, because information about your bank account is private. You should follow the instructions in the letter or other notice. There is usually a deadline for telling the court that you think money in your bank account is exempt from garnishment, so make sure you meet the deadline specified in the notice.

Separate account relationships -- where only Social Security benefits are deposited into the account -- appear to be the best way to protect those deposits from some types of garnishment. Discuss this with the bank when establishing a separate account.

Canceling direct deposit of benefit checks is an alternate solution as discussed by Bankrate's Bankruptcy Adviser, Justin Harelik, in the column "Can creditor garnish bank account?" You could then get a live check and keep the money outside the banking system.

But I worry that such a move would create a host of other problems, including the potential for check theft and questions about where you’d cash your checks. Also, keeping the Social Security money outside of a banking relationship would make it more difficult to use this money to pay bills without spending a lot in fees for money orders.

An answer to that may be the government's Direct Express debit card, where your Social Security benefits are electronically loaded to a debit card that is not affiliated with a traditional bank account. The card is discussed on the Social Security Web site page "Get Your Benefit Payment Through The Direct Express Card."

Read more Dr. Don columns for additional personal finance advice.

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