June 3, 2009 2:28 AM
- Text
Creditors Use Loophole To Seize Benefits
(AP)
Bill collectors are exploiting a legal loophole to seize Social Security and veterans' benefits even though federal law is supposed to protect the payments from creditors.
Lawmakers from both parties who have been pressing the Treasury Department for years to close the loophole with new regulations are growing impatient. The Obama administration is now promising action but has offered no timetable for developing the new rules.
Federal law has long protected Social Security and veterans benefits from most creditors, with a few exceptions for child support, alimony, unpaid federal taxes and debts to other federal agencies. But creditors have been seizing the payments anyway by getting court orders to freeze and garnish bank accounts that receive the benefits through direct deposit.
Activists say the issue has festered for years, but has intensified as more recipients get their benefits deposited directly into bank accounts.
Many people who receive Social Security or veterans benefits can't afford to have their bank accounts frozen for even a short period of time, said Margot Saunders of the National Consumer Law Center. It's hard to hire a lawyer to get your money back when all your resources are frozen, she said.
"They take all your money, and they take it illegally," Saunders said. "But when you live on $700 or $800 a month and have all that money garnished, there's very little recourse."
Over a 12-month period in 2006-2007, an estimated $178 million was garnished from bank accounts that included a mixture of Social Security benefits and other deposits, according to the Social Security Administration's inspector general.
"Some banks are doing the right thing to protect their customers by denying creditors' requests to freeze and garnish accounts with Social Security funds, but too many banks are not," Sen. Herb Kohl, D-Wisc., chairman of the Senate Special Committee on Aging, said this week.
"We need our banking regulatory agencies to recognize this widespread problem and start enforcing the law," he said.
Kohl and other lawmakers have introduced a bill that would stop further promotion of the direct deposit programs for Social Security and veterans' benefits until the Treasury Department issues rules to protect the benefits from creditors. More than 80 percent of the 51 million Social Security recipients get their payments through direct deposit.
Assistant Treasury Secretary Michael Barr was asked by lawmakers to commit to new regulations last month, before he was confirmed by the Senate.
"I am fully committed to ensuring that federal anti-garnishment statutes are given full force and effect," Barr said in a written response to questions from Kohl. But he said he also wanted to do it "without imposing burdens or shifting liabilities to financial institutions."
A Treasury official said this week the department has already reached policy agreements with the agencies that issue protected benefits. The next step is to write formal rules, said the official, who spoke on condition of anonymity because she was not authorized to publicly discuss the rulemaking process.
In a related issue, the California Supreme Court ruled Monday that Bank of America could recoup overdrafts and insufficient funds fees from accounts that include Social Security payments. The court said it based its ruling on state law.
The American Bankers Association said in a letter submitted for the inspector general's report that banks are often confronted with court orders to freeze or garnish accounts that include deposits from multiple sources - including money that is not protected from creditors.
Under the current system, the only "fair" response is for banks to freeze or hold the disputed amount to "provide the parties with time to work things out," the trade association said.
"Banks would welcome clear rules," the letter said.
Lawmakers from both parties who have been pressing the Treasury Department for years to close the loophole with new regulations are growing impatient. The Obama administration is now promising action but has offered no timetable for developing the new rules.
Federal law has long protected Social Security and veterans benefits from most creditors, with a few exceptions for child support, alimony, unpaid federal taxes and debts to other federal agencies. But creditors have been seizing the payments anyway by getting court orders to freeze and garnish bank accounts that receive the benefits through direct deposit.
Activists say the issue has festered for years, but has intensified as more recipients get their benefits deposited directly into bank accounts.
Many people who receive Social Security or veterans benefits can't afford to have their bank accounts frozen for even a short period of time, said Margot Saunders of the National Consumer Law Center. It's hard to hire a lawyer to get your money back when all your resources are frozen, she said.
"They take all your money, and they take it illegally," Saunders said. "But when you live on $700 or $800 a month and have all that money garnished, there's very little recourse."
Over a 12-month period in 2006-2007, an estimated $178 million was garnished from bank accounts that included a mixture of Social Security benefits and other deposits, according to the Social Security Administration's inspector general.
"Some banks are doing the right thing to protect their customers by denying creditors' requests to freeze and garnish accounts with Social Security funds, but too many banks are not," Sen. Herb Kohl, D-Wisc., chairman of the Senate Special Committee on Aging, said this week.
"We need our banking regulatory agencies to recognize this widespread problem and start enforcing the law," he said.
Kohl and other lawmakers have introduced a bill that would stop further promotion of the direct deposit programs for Social Security and veterans' benefits until the Treasury Department issues rules to protect the benefits from creditors. More than 80 percent of the 51 million Social Security recipients get their payments through direct deposit.
Assistant Treasury Secretary Michael Barr was asked by lawmakers to commit to new regulations last month, before he was confirmed by the Senate.
"I am fully committed to ensuring that federal anti-garnishment statutes are given full force and effect," Barr said in a written response to questions from Kohl. But he said he also wanted to do it "without imposing burdens or shifting liabilities to financial institutions."
A Treasury official said this week the department has already reached policy agreements with the agencies that issue protected benefits. The next step is to write formal rules, said the official, who spoke on condition of anonymity because she was not authorized to publicly discuss the rulemaking process.
In a related issue, the California Supreme Court ruled Monday that Bank of America could recoup overdrafts and insufficient funds fees from accounts that include Social Security payments. The court said it based its ruling on state law.
The American Bankers Association said in a letter submitted for the inspector general's report that banks are often confronted with court orders to freeze or garnish accounts that include deposits from multiple sources - including money that is not protected from creditors.
Under the current system, the only "fair" response is for banks to freeze or hold the disputed amount to "provide the parties with time to work things out," the trade association said.
"Banks would welcome clear rules," the letter said.
Latest Now in MoneyWatch
- Could "web-lining" be dangerous?
- Insurers respond cautiously to contraceptive plan
- Judge: Legally, breastfeeding not related to pregnancy
- Budget deficit drops to $27 billion in January
- Why the Powerball Jackpot is part of my investment strategy
- Is the new VW Beetle diesel worth the money?
- Consumer sentiment highlights risks to recovery
- Valentine blues? 10 best cities to be single
- December trade deficit widens to $48.8 billion
- Alcatel-Lucent returns to profit in 2011
- 6 things never to say in a performance review
- $26B mortgage deal: Who gets the money?
- Friendly's CEO steps down
- Quarterly loss hits $3.3B at Postal Service
- Greeks rail against cuts as EU demands more
- 6 things you should never share on Facebook
- Make moves now to increase financial aid
Latest CBS News Headlines
on Facebook
on CBS News
- NATO extends Baltic air patrols
- Vatican says no Iran trip planned
- Egypt's ruling generals meet top Pentagon general
- Libya asks Niger to hand over Gadhafi's son
on Facebook
- Adele sings a cappella for Anderson Cooper
- Beyonce and Jay-Z post first photos of Blue Ivy Carter
- Occupy protestors kicked out of CPAC
on CBS News
