The U.S. Treasury is sending out 80 million stimulus checks this week, the first part of its effort to put cash into Americans' hands to ride out the coronavirus pandemic. But many of those checks will never reach the people they're intended for.
John Keffer, a 65-year-old living in Newton, Kansas, is one such person. Keffer told CBS MoneyWatch the state claims he owes more than $8,000 for back child support, which he disputes. But after having found out about stimulus checks, Keffer called the state and was told he wouldn't be getting any of the $1,200 — it would all go to offset his debt.
"They're going to keep all of my check," said Keffer. He draws a federal pension and Social Security benefits, and was planning to use the extra cash to move to a better apartment.
Kansas child services officials disagree with Keffer's contention. But child support is just one of many ways that people expecting a stimulus check could lose it.
Anyone with a judgment against them for credit-card debt, medical debt or any other kind of private debt can lose their stimulus money to a debt collector. The CARES Act made clear that the stimulus checks were not subject to most state and federal debt, but did not address the issue of private debt that includes everything from doctor bills to education loans.
"Congress unfortunately put in no protections in place for poor or working-class families, to prevent these checks being seized by debt collectors or banks themselves," said Rohan Pavuluri, CEO of Upsolve, a nonprofit that helps people file for bankruptcy.
70 million Americans have debt woes
Debt is one of the most common issues facing U.S. consumers. About 70 million Americans report they've been contacted about a debt or are in debt collections, according to the Consumer Financial Protection Bureau.
Many others aren't notified about debt, and only find out they owe when they see money missing from a bank account, a paycheck or a.
That's what happened to Grace, a 40-year old mother of two living in Queens, New York. Grace, who asked that her last name be withheld out of discomfort discussing her personal financial situation, said she received a marshal's notice about a month ago letting her know her wages would be garnished. She wasn't able to fight it in court before the state went on lockdown, and now loses a tenth of her paycheck every two weeks.
"I am worried about the stimulus check being affected because of the garnishment," Grace said. Her food expenses have gone up, she said, because — faced with New York's shortages — she now goes to Connecticut to shop. She also wants to have enough money on hand to buy insulin for one of her children, who is diabetic.
Since the beginning of the coronavirus crisis, lenders have stepped up their efforts to collect what's owed. For example, the Boston Consulting Group in March issued a two-part report, titled "Winning in the Next Era of Collections," outlining how financial institutions should approach collections in lean times. The report advised banks to "massively shift resources to and within collections," while reminding them to "look at all collections actions through a customer-fairness and reputation lens."
Not every collector has gotten that message. "It's not just business as usual but it's even more aggressive — [creditors] are trying to rush to get people's money before they run out," said Susan Shin, legal director at the New Economy Project, a New York-based nonprofit that also runs a legal assistance hotline. Some of their clients have had their bank accounts frozen over a debt, while others are physically walking to bank locations, despite the pandemic, to try to resolve a collection issue.
"It's a travesty," Shin added. "The idea that people could get this money only to lose it to debt collectors — it's literally putting people's lives at risk."
Courts are no recourse
Many states, including New York, have closed down courts for nonessential services during the pandemic, but all that does is prevent new debt-collection actions, Shin explained. For those — like Grace — who already have judgments against them, closed courts mean they can't fight the collection of a debt they may or may not owe. More than 4 in 10 people subject to debt collection efforts say they don't owe the money, according to the CFPB.
The New Economy Project is one of many consumer advocacy groups calling for a moratorium on all private debt collection for as long as the coronavirus wreaks havoc on the economy. Such a moratorium would help people like Grace, but not John Keffer, whose alleged debt is to the state. (Keffer said he is in touch with his senator's office to try to resolve his issue.)
Others, including the National Consumer Law Center, have asked the U.S. Treasury to categorize the checks as a federal benefit — like Social Security payments or Veterans Administration benefits — to protect them from garnishment.
"Millions of Americans have court judgments against them—often issued many years ago by default without the consumer's knowledge. These consumers may not realize that they are potentially subject to bank account seizure, including the immediate loss of a stimulus payment," the NCLC said.
Some states have made this change on their own. Massachusetts, New York and Ohio moved last week to protect stimulus payments from debt collectors. Twenty-five state attorneys general, as well as Senators Sherrod Brown, Josh Hawley, Elizabeth Warren and Ron Wyden, have called on the Treasury to make this policy official and to treat the checks as federal benefits, which would protect them from being siphoned to pay debt.
Even the banking industry has chimed in, writing to Congress that unless it changed the law, banks would be "legally required" to hand over stimulus money to creditors, and urging a congressional fix. Banks have also taken people's stimulus checks to cover previous late fees or overdrawn accounts, the New York Times reported.
The Treasury did not immediately respond to a request for comment.
Protect your check
For Americans concerned about losing their stimulus checks, the NCLS offers some guidance. People whose bank accounts have been garnished before, those who have ever lost a court lawsuit or who were served papers for a lawsuit that they didn't respond to, may be most at risk, the center said.
It's also safer to request your payment in a check rather than though direct deposit, suggested NCLC Associate Director Lauren Saunders.
"Checks are less at risk than direct deposit, but do not try to deposit a check to an account or at a bank that has a garnishment order. Sign it over to a family member to cash," she said via email.
This story has been updated to more fully describe the contents of a March report on collections from the Boston Consulting Group.