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other income was deposited on April 2, $500 was withdrawn on April 3, and the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deposited into or withdrawn from the account (in contrast to Virginia’s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.
