Are Federal Benefits Safe From Garnishment?

Dear Debt Adviser,

I've become disabled and draw a federal veteran's disability pension. Can it be garnished by a credit card company?

-- Mike

Dear Mike,

I have good news for you. The U.S. Department of the Treasury recently enacted a new regulation that requires banks to protect federal benefits from being garnished. Before these protections were in place, exempting federal benefit payments from being garnished was hit or miss depending on your showing up in court or proving that the funds in your account were exempt. Here is what you need to know:

--The new law became effective May 1, 2011, and requires banks to review accounts when they receive a garnishment order. If the account contains federal benefits from any of the following sources, then the bank must protect those funds: Social Security, Supplemental Security Income, Veterans Affairs, Railroad Retirement, Railroad Unemployment Insurance, Civil Service Retirement System and benefits from the Office of Personnel Management or Federal Employees Retirement System. Well, at least a portion of them.

--In order for the federal benefits to qualify for protection, they must be directly deposited into the bank account. Federal benefit deposits made by check do not qualify for protection.

--The protected amount is based only on the federal benefit deposits identified in the previous two months immediately preceding the garnishment order. The bank is required to review the accounts of the person named in the garnishment order within two days after receipt of an order. For example, if during the look-back period the bank identifies two federal benefit deposits of $1,000 each, they are required to protect $2,000 of funds in the account.

--The bank is required to review all accounts for the person named in the garnishment order, but is only required to protect funds in the account(s) where the federal benefits are direct deposited. So, if you move money from your checking account (where your VA benefit is direct deposited) into your saving account, the funds in your saving account are not protected from garnishment.

--Any funds in the account in excess of the protected amount established during the two-month period preceding the garnishment order are not protected and are eligible for garnishment per the order received by the bank.

  • If the garnishment is to pay delinquent child support or a federal debt, then the above rules do not apply and all the funds are subject to the court order or IRS levy.

So, if your bank receives a garnishment order for you and your Veterans Affairs benefits are directly deposited, they should be protected. But, any money in the account in excess of two months of VA deposits or any money in other accounts at that bank would be fair game for the credit card company.

I recommend you communicate with the credit card company to let them know you are on a fixed disability income and cannot afford to pay what you owe -- and do not let things progress to the garnishment stage. Garnishments also usually come with some additional legal fees. And finally, the public record of the court action will show up on your credit report as a serious negative for the next seven years; potentially causing you lending, insurance, apartment rental and employment difficulties.

A garnishment order is the last stop in what is often a very stressful collection process and one that I would encourage you to avoid.

Good luck!

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