Category Archives: Debt Collection

Help! I Got Notice That an Old Judgment Has Been Renewed

gavel over money istockASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

About five years ago I moved to Nebraska from California. I just got a notice in the mail that a judgment obtained against me about 20 years ago has been renewed. It previously got renewed ten years ago. The amount now due is almost $10,000. I incurred this debt almost 20 years ago when I was 19 and have been ignoring it all these years. I just bought a house and don’t want this messing up my credit. How did the creditor find me? I spoke to a Nebraska lawyer who told me I will need a California lawyer to handle this. 

What can I do? 

Yours truly, 

Joanne

Dear Joanne,

California law provides that a judgment is enforceable for ten years. Before it expires, the plaintiff can renew it for another ten years. And then before that ten years expires, the plaintiff can renew the judgment again, for another ten years.

I assume the notice that was mailed to you came from the plaintiff. The fact that you recently bought a house might explain how the plaintiff found you.

How the Creditor Can Collect the Judgment

You can’t go into court to “fight” the judgment. It is too late for that. The judgment is valid proof that you owe the money. I expect the plaintiff (also called the judgment creditor or judgment holder) will file its judgment in the Nebraska court to obtain a “sister state judgment.” That will allow it to enforce the judgment against you in Nebraska. Enforcement may include a wage garnishment, seizure of bank accounts, and placing a lien on your house. (Learn more about the ways that judgment creditors can collect against you.)

Options for Dealing With Old Judgments

Your options are quite limited.

Attack the Judgment Creditor’s Standing

You might try to attack the judgment holder’s standing to enforce the judgment by demanding proof that it is the rightful owner of the judgment. Debt paper is bought and sold all the time. I would not be surprised if this debt has not already been sold many times over. Often the paperwork to prove the rightful ownership of the debt is inadequate or nonexistent.

However, the legal fees you would incur to do something like that may be a waste of good money. The court may rule that your time to attack the judgment’s ownership has already expired. Or, if you are allowed to make what we call a “collateral attack” on the judgment, the court might find that the plaintiff’s proof of ownership is beyond dispute.

Negotiate a Settlement

Your strategy to ignore this and refuse payment has been very successful for almost 20 years. That is, until now. If this is your only debt problem, your other option is to negotiate a settlement. Often these things can be settled for a lump sum payment of 50% or less. (Get strategies for negotiating with creditors.)

File for Bankruptcy

But if you have other troublesome debts, go and see a local bankruptcy lawyer for advice.

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

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Nasty Phone Call From IRS Auditor: Could It Be a Hoax?

Consumer Complaint iStock_000004051547XSmallASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon, 

I received the same threatening message three separate times on my home answering machine. The voice is strongly accented, loud, threatening, cruel, harsh, nasty, condemning, harassing, and then oddly, at the very end, almost kind and pleasant. 

Here is the transcription – the punctuation is mine: 

“Hi this is Melwyn Thatcher (name unclear due to accent) calling from the tax audit department of the Internal Revenue Service. The nature behind this voicemail is to make you aware about a situation. We have received a legal petition notice against your name concerning an illegal tax evasion, a tax fraud. Be aware that we are taking the matter to the federal (unclear word) courthouse and we’re about to issue a warrant for your arrest. But before we go ahead and do anything like that, if you need any further details relating to this case you can call us back on our call back number 888-393-2421. I repeat 888-393-2421. Again this is Melwyn. You have a great day here. Thank you very much.”

By the way, I do not owe the IRS any money. In fact, I am totally debt free. Is this a hoax, or something I should be worried about? 

Very truly yours, 

Anita

Dear Anita,

Should you be worried? Absolutely not.

I am so glad you didn’t return the phone call. If you had, THAT would be worrisome.

I have no doubt that many serious crimes are involved in the transmission of that message. You and probably thousands of other people are the intended victims of an outrageous consumer fraud scam. In fact, see IRS warns of pervasive phone scam.

Many of these fraudsters operate out of telephone boiler rooms in Eastern Europe and Southern Asia. Some are members of criminal gangs, others are funneling the money to fund international terrorism.

If you were to reply to this type of message, you would be badgered to pay a fictitious debt. Even if you refused to pay anything, the fraudster might still trick you into providing personal financial information and then later use this information to steal your identity. (Learn how to avoid identity theft.)

Some people do fall for these types of scam phone calls. Perhaps they have a guilty conscience about unfiled tax returns, or an old bank debt they assume has prompted the call.

You will probably receive more calls from this outfit.  Like all telemarketers, they are working their phone list. The bottom line is this:  Don’t call them back. If you answer when they call you, just hang up.

The Federal Trade Commission also recommends that you report the call to them using the FTC Complaint Assistant at www.FTC.gov. (Add “IRS Telephone Scam” to the comments of your complaint.)

-Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Can the IRS and Student Loan Creditors Collect From Me When I’m on SSI?

Erasing DebtASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon,

I am writing for a friend who doesn’t speak English.  He is worried about creditors levying his bank account to collect two old debts (a student loan and a tax debt). Should he file for bankruptcy? 

Juan is 61 years old and recently started receiving Supplemental Security Income (SSI). He will qualify for Social Security benefits soon. The student loan debt is very old (30 years) and is now $18,000 but was originally around $8,000. He hasn’t paid the loan for a long time and the creditor told him they “can take his Social Security or his SSI.” 

The second debt is old federal income taxes, around $10,000. He has failed to file tax returns for many years (perhaps as many as ten), but he has had little or no income during the same period. He wants to know if the IRS can take some or all of his SSI or later his Social Security for unpaid taxes. 

Thanks in advance for your expertise,  

Manny

Dear Manny,

Based on what you’ve told me, Juan can most likely get rid of his student loan debt because he is totally and permanently disabled. And it is almost certain that he doesn’t have enough income for the IRS to take anything from him for the old tax debt. Bankruptcy won’t be necessary.

Discharging Student Loans Based on Total and Permanent Disability

There are basically two types of student loans – subsidized (often called federal student loans) and unsubsidized (called private student loans). Subsidized loans are made or guaranteed by governmental entities. They subsidize the interest rate so that the loan interest will be less than what private lenders normally charge. Unsubsidized student loans are made by private banks. They usually charge an interest rate that is higher than subsidized loans, but still less than ordinary consumer loans.

I am sure that Juan has a subsidized loan. When he got his student loan 30 years ago, private unsubsidized loans were basically unheard of.

The distinction is important for Juan. Lenders of subsidized loans are subject to federal regulations that allow for the loan balance to be forgiven if the borrower is totally and permanently disabled, and without financial means to pay the loan. Because Juan is 61 years old and receiving SSI, he must have already convinced the Social Security Administration that he has a total, permanent disability, and lack of any other income.

How to Cancel a Student Loan Due to Disability

If Juan’s loan is indeed subsidized, he can apply online here:  www.disabilitydischarge.com.  You can submit your SSI award letter to prove you are disabled if the award says your review is not sooner than five years. Otherwise, you will need to get a letter from your doctor. (To learn more about canceling student loans because of disability, see Nolo’s article Canceling Student Loans: Permanent Disability or Death.)

Getting Rid of Unsubsidized Student Loans

If Juan has an unsubsidized loan, he is out of luck. Private lenders normally will not forgive a loan. However, in this situation he might be able to discharge the loan in bankruptcy. While wiping out a student loan in bankruptcy is difficult, lately more and more courts are discharging loans like Juan’s – very old loans where the debtor is elderly and disabled and has no hope of earning income in the future. Unfortunately, Juan would likely need an attorney to help him do this, and it sounds like he doesn’t have the money to pay what could become very high legal fees to fight with the student loan collectors.

IRS Collection Standards: When the IRS Cannot Take Your Income 

Now let’s deal with Uncle Sam, the good old IRS. According to the website of the IRS Taxpayer Advocate, the IRS can take a person’s Social Security benefits in order to repay tax debts. However, as the advocate’s website also states, the IRS must allow the tax payer to retain enough money to cover modest basic necessities. These living expense allowances are called Collection Financial Standards.

I am certain that Juan’s SSI benefit does not leave him enough to pay for basic necessities pursuant to the Collection Financial Standards. His income won’t even come close to exceeding the amount of money he is legally allowed to keep.

Juan should immediately contact the IRS and ask them to mark his account as “current uncollectable status.” They will verify his income, match it up to the living expense allowances in their collection standards, and see that his income is below the level they are allowed to collect from. It is a process that can be done on the telephone, and they will do the form for him.

Let’s recap. Juan should request forgiveness of his student loan on the grounds of total, permanent disability. He should also contact the IRS and request “current uncollectable status.”

Juan won’t need to file for bankruptcy.

— Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Debt Collection Scam in Texas?

Consumer Complaint iStock_000004051547XSmallASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Hi Leon,

On Friday I received a call from a debt collector in Texas who said he was going to file an affidavit against me based on a loan I took out in 2006 and didn’t pay back. He told me to call a different phone number to make the payment. I called that number and the person who answered said I better pay up or they would get a warrant for my arrest. He said the account originated in California, where I used to live, but was transferred to the criminal office in Texas. I have not lived in California for at least six years. 

I don’t believe I owe the debt and asked for documents to validate the claim. 

Does this sound like a scam? If so, should I contact the local police department? Should I consider bankruptcy? 

Thank you, 

Patricia 

Dear Patricia, 

I think you handled this very well. I have lots of good stuff to tell you. 

Requesting Verification of a Debt 

The Federal Fair Debt Collection Practices Act (FDCPA) gives you the right to contest the validity of a debt and to demand documents to verify the amount, validity, and the collector’s legal right to collect the debt. (Learn more about the FDCPA, including what it requires and prohibits.) 

As of now, you don’t know if the person who contacted you is authorized to collect this debt or even if you ever owed it. You were wise to demand verification. However, in order to trigger the collector’s duty to provide you with documents backing up its claim, you need to put the verification request in writing. 

The collector is supposed to advise you of your right to demand verification of the debt within five days of its first communication with you. You have 30 days from that notice to send a written verification request. Once it receives your request, the collector is supposed to stop collection efforts until it responds. 

Of course I realize the debt collector won’t give you its address – so you can’t send the written demand. I believe the reason he won’t give you an address is to prevent you from giving the written notice demanding debt verification. 

I doubt this will ever wind up in court. But if it did, there is at least one California case saying that your verbal demand for debt verification is good enough. I am certain that no court would ever reward the deceitful, illegal behavior of this despicable debt collector by faulting you over the failure to give a written demand. Especially where, as here, the debt collector has deliberately concealed its location. 

The FDCPA Prohibits False Threats 

The FDCPA also prohibits debt collectors from lying to you and making false threats. Debt collectors do not have the power to get you arrested, so threatening to do so is a violation of the FDCPA.    

The Statute of Limitations Defense  

Assuming this is a debt that was made while you were living in California, you may have other legal protections as well. The debt could be subject to California’s statute of limitations. Under that law, a lender usually has only four years in which to file a lawsuit against you (usually the four years starts when you first defaulted on the debt). It sounds like a lawsuit to collect this debt may already be time barred. 

What to Do? 

I bet the debt collector already knows all of this. The collector wanted to scare you into paying before you could find out your legal rights. I have some advice: If the collector calls you again, tell him that you are recording the call. I’m certain you will either scare him off, or else force him to be civil and respond with legitimate information to validate the debt. 

If the collector ever does provide you with documentation, your next step would be to meet with a lawyer. A lawyer can advise you if the debt is still valid, and whether or not you should consider filing bankruptcy.  

In the meantime, you can also file a complaint about the debt collector with Consumer Financial Protection Bureau at www.consumerfinance.gov/complaint.

Sincerely,

– Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Student Loans and Marriage: Go Together Like a Horse and Carriage

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

horse & carriageDear Leon,

Can creditors garnish my spouse’s wages for my defaulted private student loans? I live in California.

Liz

Dear Liz,

The answer is yes. Your student loan creditors can garnish your spouse’s wages to recover the amount of your defaulted student loan. You don’t mention whether the loan was incurred before or after marriage. Unfortunately, it doesn’t matter. Either way, the creditors can collect, but for different reasons.

Although the explanation won’t make you any happier, at least you will understand why it works this way.

(To learn about ways to manage student loan debt, get information about federal flexible repayment plans, and find out what happens if you default, visit Nolo’s Student Loan Debt area.)

If You Incurred Student Loan Debt Before Your Marriage

I will begin by assuming the debt was incurred prior to marriage.

A Primer on Community Property Law 

California is what we call a community property state. Community property is a special term used to define how property rights and financial liabilities are assigned between spouses. In a community property state, property that each of you had prior to marriage remains your separate property. Debts that each of you had prior to marriage remain your separate debts. Any assets and debts acquired by either spouse during marriage are normally assigned to the community, that is, to both spouses regardless of who brought it in (there are some exceptions, but those would not apply here).

That brings us to the justification for the garnishment of your spouse’s wages for your separate pre-marital debt. Your spouse does not “inherit” your debt. But under the definition of community property, half of your spouse’s wages belong to you. So the student loan creditor can garnish the part of your spouse’s wages that belong to you under the community property laws.

(To  learn more, see Nolo’s article Debt and Marriage: When Do I Owe My Spouse’s Debts?)

Enter the Prenuptial Agreement

All of this explains why some couples opt for a prenuptial agreement. They wish to be a married couple, but for their own reasons they don’t want to share their post nuptial income equally with each other.

I assume you did not have a prenuptial agreement. You might go to a divorce lawyer and look into the feasibility and enforceability of entering into a post nuptial agreement. A post nuptial agreement might do the same thing to protect your spouse’s income as a prenup might have done. The completion of either a divorce or a legal separation agreement might also protect your spouse’s wages from your student loan garnishment.

A word of caution: Marital agreements don’t always hold up in court. I can imagine a creditor complaining that a post-nup be invalidated as a fraudulent transfer.

(Learn more about prenuptial agreements.)

If You Incurred the Student Loan Debt During Marriage

Finally, what if the student loan had been made during the marriage?  The creditor could still garnish your spouse’s wages, because the wages are community property. Moreover, spouses are normally liable for each other’s debts that are incurred during the marriage. It usually makes no difference that the promissory note for the student loan was never signed by your spouse.

Comedian Red Skelton, who often joked about marriage, once said, “I love my wife. We always hold hands. If I let go, she shops.”

Red must have lived in a community property state.

Sincerely,

– Leon

Leon Bayer is a Los Angeles bankruptcy attorney.  He is a partner at Bayer, Wishman & Leotta, a California law firm specializing in bankruptcy.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

Supreme Court Says Prevailing FDCPA Defendant Can Collect Costs

In a recent opinion, Marx v. General Revenue Corp., the United States Supreme Court dealt a bit of a blow to consumers bringing lawsuits for violations of the federal Fair Debt Collection Practices Act.  The Court ruled that a prevailing defendant in a FDCPA lawsuit can collect costs from the plaintiff without proving that the plaintiff brought the lawsuit in bad faith or to harass the defendant.

Here’s what this all means.

FDCPA Lawsuits

The FDCPA is a federal law that prohibits debt collectors from using unfair, deceptive and harassing tactics while collecting debts. If you bring a FDCPA lawsuit and win, you can get damages as well as recover attorney fees, court costs, and other costs of bringing the lawsuit.

(Learn more about FDCPA lawsuits in Nolo’s Illegal Debt Collection Practices area.)

When the Plaintiff Loses a FDCPA Lawsuit

But what happens if you bring a FDCPA lawsuit and lose?  Can the defendant collect attorneys fees and costs against you?

The FDCPA makes clear that if the plaintiff brought the lawsuit in bad faith, or with the purpose of harassment, then the defendant debt collector can recover attorneys fees and costs.

However, a separate federal law, Federal Rule of Civil Procedure 54(d)(1) allows the court to award to a prevailing defendant (that is, a defendant that successfully defends the the case) the costs it incurred in bringing the lawsuit.

The question for the U.S. Supreme Court in this case was whether the FDCPA’s requirement that the defendant prove bad faith meant that FRCP 54(d)(1) did not apply.

Prevailing FDCPA Defendants Can Be Awarded Costs

The Court ruled that a court may award costs to a prevailing defendant under FRCP 54(d)(1). However, keep in mind:

  • the key word is may; the court doesn’t have to award costs and might not if it finds the plaintiff is indigent
  • this opinion applies to costs only; in order to get attorneys fees, the defendant must still prove that the action was brought in bad faith, and
  • costs can be more than just the court filing fee; costs may include deposition costs and other things associated with the lawsuit.

You can read the full opinion here:  Marx v. General Revenue Corp.

Why Did My Mortgage Lender Pay My Delinquent Property Taxes?

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Dear Leon:

I own a home and am current on my mortgage. I recently fell behind on my property taxes. My lender paid the taxes and is now billing me for them. Why would the bank pay my taxes?  And what happens if I don’t reimburse the lender for the tax payments?

Dear Stan:

If you don’t pay your property taxes, the bank will advance money to pay the property taxes, then turn around and bill you for that cost. If you don’t reimburse the bank for the taxes you owe, your lender can foreclose on your home.

Here’s why this happens.

The Lender Wants to Protect Its Interest in the Property

If you have a mortgage on your home or other real estate, the lender has a security interest in your home. If you default on the mortgage, the lender can take the home back to get reimbursed for the mortgage payments you owe. This is called foreclosure. Not surprisingly, the lender wants to protect its interest in your property, and make sure nothing happens that will hurt its ability to foreclose or to get reimbursed for mortgage payments.

For this reason, your lender will require you to maintain fire insurance and other types of homeowner’s insurance. In addition to keeping the property insured, the lender will also require that you stay current on the property taxes (this will be part of your mortgage contract). Here’s why the lender cares about your property taxes being current.

Why Does the Lender Care About Property Taxes?

Under the California State Constitution, property taxes become a priority lien on the property as soon as the county tax assessor issues an assessment notice for the tax. The “priority part” means that the property tax lien jumps ahead of the mortgage.

If the taxes remain unpaid for a long enough time (usually five years), then the county has a tax sale of the property. The tax sale of the property is not subject to the other liens against the property. This means the buyer at the tax sale takes title free and clear of any other encumbrance, not even the mortgage! Hence, banks are scared to death of letting property be sold at a tax sale because it wipes out their mortgage.

A mortgage lender is in for a horrible loss if they let that happen. Somebody might walk away with the property as the successful bidder at a tax sale, paying far less than market value, and the mortgage lender might get absolute nothing!

How the Lender Protects Itself

Lenders can protect themselves from losing their collateral at a tax sale by monitoring the tax delinquency status on every parcel they have loaned against. If the borrower fails to pay the property tax, the lender will advance the money to pay the taxes. That removes any danger of a potential tax sale, and then the lender can bill the owner for the taxes that the lender has paid.

Paying the taxes also allows a lender to take their sweet time in foreclosing on the borrower. For example, a bank won’t rush through a foreclosure if it already has too many repossessed condos in their inventory.

If you have delinquent taxes, you can work with the IRS to structure a payment plan. Learn more in our Back Taxes & Tax Debt area.

Guest blogger Leon Bayer practices bankruptcy law in Los Angeles, California.  He is a partner at Bayer, Wishman & Leotta.  The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Find Leon on Google+

What Are the Chances That an Unsecured Creditor Will Collect Anything From a Chapter 13 Bankruptcy Debtor?

ASK LEON 

Bankruptcy expert Leon Bayer answers real-life questions.

Hello Mr. Bayer, 

Recently someone who owes me money filed for Chapter 13 bankruptcy in Connecticut. I filed a proof of claim for $2,000 with the bankruptcy court. What are the odds of recovering this money? Would it be worth my while to follow this to the end? 

Thanks in advance for your help.

James

Dear James,

The odds are not good for an unsecured creditor to recover any meaningful amount in Chapter 13 bankruptcy. Based on my personal practices and observations, I would guess that the average unsecured creditor generally receives a few pennies on the dollar. Most of the money in Chapter 13 cases is paid to secured creditors.

You have probably received a copy of the debtor’s Chapter 13 repayment plan, and it should say what percentage on the dollar unsecured claims like yours may receive. (Learn more about what gets paid through the debtor’s Chapter 13 repayment plan.)

I think you have adequately covered your bases if you have correctly filed a proof of claim. Of course, there are other things you might be able to do, but it will be difficult without an experienced bankruptcy lawyer helping you. Usually, bringing  a lawyer into a small case is not cost efficient.

However, here’s a valuable insider’s tip that might save you money and let you benefit from someone else’s work. If you have solid information that may be detrimental to the debtor, share it with the trustee immediately. For example, a trustee will be very interested to know about income, assets, and transfers of assets that the debtor has not disclosed in the bankruptcy schedules.

Every Chapter 13 case is administered by a Chapter 13 trustee, and a trustee will object to confirmation of a plan where the trustee feels that the debtor is ineligible, the plan is proposed in bad faith, or that the proposed plan fails to meet any of the other requirements of the law. (Learn what a bankruptcy trustee does.)

-Leon

Guest blogger Leon Bayer practices bankruptcy law in Los Angeles, California.  He is a partner at Bayer, Wishman & Leotta.  

The opinions and advice in this blog post are from Mr. Bayer alone, and should not be attributed to Nolo.  By answering a question on this blog, Mr. Bayer does not become your lawyer.

Aggressive Hospital Debt Collection Company Under Fire

Picture this: You rush your child to the emergency room, only to be greeted at the door by someone who looks like a hospital employee, demanding payment for a previous medical bill before your child gets treatment.

Sound crazy? Not if the hospital you rush to has a contract with medical debt collection company Accretive Health.

According to the Minnesota attorney general, Accretive Health regularly places employees in hospitals and tries to collect debts from people about to go into surgery, labor and delivery, or the emergency room. It’s likely that many patients believe the debt collectors are hospital employees, and think they won’t get care unless they pay up. In the process, the attorney general alleges, Accretive has access to private medical information about patients, in violation of various federal laws.

You can read more about Accretive’s aggressive and possibly illegal debt collection tactics in today’s New York Times article.

In the meantime, if you are struggling with medical debt, check out Nolo’s article on Managing High Medical Bills.

 

Protection From Garnishment for Social Security, Veterans Benefits

A new treasury rule, effective May 1, 2011, will provide more protection to receipients of federal benefits from garnishment of their bank accounts.

Garnishment and Federal Benefits: The Basics

If a creditor gets a judgment against you, it has various tools to collect on that judgment. One tool allows the creditor to garnish (grab the money in) your bank account. But there are limits to garnishment. Judgment creditors cannot grab funds that come from certain sources, including some types of federal benefits such as Social Security, Supplemental Security Income, veterans benefits, and a few others.

Although these types of funds cannot be seized by creditors, in practice, when banks got a garnishment order in the past, they often froze all funds in the account (up to the amount of the debt), without regard to whether the funds were protected from garnishment. This means the bank accountholder would not be able to access those funds for weeks or months. The accountholder could object to the garnishment of the protected funds to prevent the bank from turning them over to the judgment creditor. But many people were unable to complete the paperwork and procedure to do so, and so lost funds that never should have been seized.

The New Rule: The Onus is on the Bank

The new rule puts the onus on the banks. Banks receiving garnishment orders must now determine if the bank account has protected federal benefits that have been electronically deposited into the account within the previous two months. If the bank discovers that there are protected funds, it cannot include those funds in the account freeze.

What This Means for Accountholders

Federal benefits received and deposited in a bank account via paper check are not protected by this new rule. Nor are funds received (even if received electronically) more than two months prior to the garnishment order. However, the regular state procedures for challenging a garnishment order will still be available for these types of funds. Federal benefit recipients currently receiving paper checks should consider switching to electronic deposit of their benefits.

For More Information

If you receive federal benefits and think you might need protection from bank garnishments, be sure to read about the nitty, gritty details of this new rule (this post just covers the very basics). For the short term, you can get an excellent summary of the new rule, as well as recommendations for how beneficiaries of federal benefits can best protect themselves, from the National Consumer Law Center at http://shop.consumerlaw.org/pdf/nclc-rpts-repo-jan-feb-2011.pdf.