Recipients of certain federal government benefits should soon get some additional protection from creditors who want to seize the direct-deposited funds for repayment of debt.
Federal law already prohibits creditors from taking government benefits out of checking accounts to satisfy unpaid debts. However, creditors have used court orders to freeze the accounts so that the beneficiaries are unable to use the funds. When the beneficiary is overwhelmed by the paperwork to unfreeze the account, the bank hands over the supposedly off-limits funds to the creditor, causing significant hardship to the beneficiary.
The new rule will establish procedures that financial institutions must follow when they receive a garnishment order against an account holder who receives certain types of federal benefit payments by direct deposit, according to a summary published Feb. 23 in the Federal Register.
Financial institutions will need to identify which accounts contain protected benefits, figure out how much was deposited during a two-month "look-back" period and ensure that the account holder has access to at least that much or the current account balance, whichever is less. The rule also contains notification requirements and a liability safe harbor for financial institutions.
The rule should help seniors, military veterans, people with disabilities and others who receive federal benefits by direct deposit, according to the National Consumer Law Center in Washington, D.C.
"The new rule prohibits the practice of denying beneficiaries access to these essential funds in bank accounts," the organization said in a statement.
The final rule is open for public comment until May 24; however, an interim final rule will take effect May 1. The rule is being issued by five agencies: The U.S. Treasury, Social Security Administration, Department of Veterans Affairs, Railroad Retirement Board and Office of Personnel Management.
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