retirement

Can Social Security be garnished?

Losing the levy

Once you make an arrangement with the appropriate agency to repay your debt, the Social Security garnishment is released. In some cases, you may be able to negotiate a settlement.

"There are rules allowing all the agencies, when someone owes money to them, to make some compromises with the debtor, to set up payment plans and, in true hardship circumstances, provide some other relief," says Carolyn Carter, deputy director of advocacy with Boston-based National Consumer Law Center.

“The agency, in our experience, is really quite willing to work with you. I can't remember one case where we had a good-faith attempt to pay the debt off and they proceeded to levy against Social Security.”

For tax debt, you may be able to negotiate an agreement to pay less than your full bill if you are truly strapped. But be aware that the IRS has strict eligibility rules for this arrangement, called an Offer in Compromise, and charges a $186 nonrefundable fee to apply.

While the garnishment of Social Security benefits by nongovernment creditors is against the law, a troublesome loophole has been the ability of banks to automatically freeze customers' accounts and use the funds to pay creditors. Often there was little effort to prevent Social Security funds from being included in that freeze, and the burden was on the debtor to prove that some of the funds paid out should have been exempt.

A federal regulation that took effect in May 2011 requires financial institutions to determine whether a debtor's account contains Social Security benefits and other exempt funds. The federal government now applies an electronic tag to these funds when they are deposited directly. The bank must protect all tagged deposits made during the two months preceding the receipt of a creditor's garnishment order.

Escaping garnishment

Your best bet to avoid the threat of garnishment is to act as soon as you realize you're having trouble paying your debt, especially if you owe the IRS. That means mustering up the courage to contact the agency and ask for help in working out a payment plan

"The agency, in our experience, is really quite willing to work with you," Hoffman says. "I can't remember one case where we had a good-faith attempt to pay the debt off and they proceeded to levy against Social Security."

For student loan debt, Carter says you'll have a wider range of options if you haven't already defaulted. The National Consumer Law Center operates a website that offers information and advice for those having trouble repaying student loans. Find more information at NCLC.org.

"There are all sorts of programs for them to do what you might call workouts of their student loans -- reducing the interest rates, changing the payment schedules," Carter says. "In some circumstances, deferments are available. If the student is totally and permanently disabled or if the school closed while the student was there, and in some other circumstances, the student can get the loan discharged."

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