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Tuesday, October 13, 2015

Garnishments and Social Security Benefits: Are New Treasury Regulations Unfair to Creditors?

In Virginia, a bank garnishment can work to seize all of the funds held in or deposited into a judgment debtor’s bank account between the date the garnishment is served and the return date specified on the garnishment. Certain monies, however, are exempt from garnishment under applicable law, including social security benefits. Historically, the burden of proof has been on the debtor, and not the bank, to identify to the court those monies in a garnished bank account that constitute exempt social security benefits. This generally required a hearing, and in some cases, bank accounts could be frozen for 60-90 days before the social security benefits could be released. Furthermore, Virginia followed a first-in-first-out rule for garnishments, meaning that social security benefits deposited into an account prior to service of the garnishment could lose protection if subsequent monies were deposited into the account and subsequent withdrawals were made. For example, if $500 of social security benefits were deposited on April 1, $500 of other income was deposited on April 2, $500 was withdrawn on April 3, and the garnishment was served on April 4, thereby seizing a total of $500, none of the garnished funds would be considered exempt. 

Recently, the U.S. Treasury Department has issued regulations (31 C.F.R. 212) that give the banks the power and the obligation to identify and protect directly deposited social security benefits. These regulations preempt state law. Now, when a bank is served with a garnishment for an account into which social security benefits are directly deposited, the bank has two days to conduct a review to determine what funds are protected. During this two-day period, the bank must provide the account holder with “full and customary access” to the protected funds. Thus, the bank must allow checks to clear and withdrawals to take place during the two-day window. The bank cannot freeze the account or it would run afoul of this “full and customary access” language.

Furthermore, if there are direct deposits of social security benefits into the account, then at least two months of social security benefits are protected regardless of when they were deposited into or withdrawn from the account (in contrast to Virginia’s first-in-first-out rule). Accordingly, in the prior example given, the entire balance of the garnished account would be considered exempt. Finally, once the bank determines the amount of the protected funds, the garnishment ends and the bank will not honor the same garnishment for additional funds deposited into the account.  This is in striking contract to Virginia law, which provides that all funds deposited into the account prior to the return date are subject to garnishment. 


The Treasury regulations attempt to balance the interests of the social security recipient, the bank, and the creditor. Without question, the regulations relieve the courts of the difficult task of identifying protected funds. However, since the creditor has no legal right to challenge the bank’s determination, and since it remains unclear how other funds in the account will be treated during the two-day review period, the initial reaction of the creditors’ bar is that the regulations are unfair. If the regulations work to give debtors an additional two-day window to withdraw unprotected funds, then without question, the regulations will negatively impact creditors.