Frozen Assets

Randall Pinkston is a CBS News correspondent based in New York.
Waverly Taliaferro, 70, of New York, testified last week before the Senate Finance Committee about a financial foul-up that threatened the health and well-being of himself and his wife. His story, unfortunately, is not unique.

He retired in 2001. In 2003, his wife lost her job, leaving the two of them totally dependent on his monthly Social Security check. Soon, they fell behind paying their credit card bills.

In 2006, Taliaferro's creditors obtained a judgment and froze his Citibank account. What's the problem? Well, the account was not supposed to be frozen. Federal law exempts specifically exempts Social Security, veteran's benefits and similar "safety net" payments from garnishment.

Taliaferro found out his funds were frozen when he tried to withdraw money from the ATM to buy groceries. The next day, he found an attorney with South Brooklyn Legal Services who wrote a letter to the bank, explaining that the sole source of Taliaferro's funds came from Social Security.

According to Taliaferro's attorney, it took 23 days for the freeze to be removed. Taliaferro could have asked relatives for help, but the ex-Army veteran was too proud – and embarrassed. Instead, for more than three weeks, he and his wife ate all of the canned goods in their pantry, finally dining on a 10-pound bag of rice three times a day. He lost 40 pounds; his wife's dress size went down 3 sizes. Fortunately, they did not become ill.

The bank eventually acknowledged that the funds were indeed "exempt" and not subject to being frozen. But why do banks freeze funds that are exempt, in the first place? Banks give two reasons: first, the bank doesn't know whether funds in a person's account are exempt because the bank doesn't know the source of the funds.

Nessa Feddis, senior counsel of the American Bankers Association explains it this way: "A lot of times, funds are commingled with non-Social Security benefits and it's impossible then, or very, very difficult to sort out which was derived from a Social Security benefit or which from something else. It's rather like looking at a plate of scrambled eggs and figuring out which egg came from which chicken."

Banks also say that, notwithstanding federal prohibition against freezing "exempt funds," state laws require banks to act on court orders obtained by creditors. If the order is ignored, says a bank spokesperson, they could be subject to sanctions.

Consumer advocates say banks can help people like Taliaferro avoid the embarrassment and stress of improper debt collection. Since most Social Security payments are made via automatic deposit, there are words and coding that identifies the source of the payment. According to South Brooklyn Legal Services, four banks, Chase, Banco Popular, Astoria Federal and New York Community Bank check to see if an account contains only direct deposit Social Security Payments. If they do, the account isn't frozen.

Why don't other banks follow their example? Johnson Tyler of South Brooklyn Legal suspects profits may have something to do with it. Each time an account is restrained, the bank charges the account holder up to $100 or more in fees. In addition, frozen accounts usually trigger bounced checks, which also generate fees.

Federal financial regulatory agencies, including the Federal Deposit Insurance Corporation and the Department of the Treasury, are proposing a series of "best practices" to protect benefit payments from garnishment orders. One idea is to allow consumers access to the portion of the account which comes from exempt federal benefit funds.

After the trouble with his first bank, Waverly Taliaferro subsequently opened an account with Chase, which has a policy against freezing Social Security payments. Sixteen days after opening the account, his Chase account was frozen and his funds were, once again unavailable for several days. While he pays off his debt, he's looking for a safe place to deposit his Social Security check.