A new interim federal rule effective May 1, 2011 protects from garnishment a portion of certain federal benefits direct-deposited into judgment debtor's account within two months of the garnishment. The interim rule requires banks, credit unions and other financial institutions to change the way they process and respond to garnishments of accounts containing federal benefits, including Social Security benefits, SSI benefits, Civil Service Retirement benefits, Federal Employee Retirement Systems, VA benefits and Federal Railroad retirement, unemployment and sickness benefits. The interim rule does not protect from garnishment federal benefits paid into a judgment debtor's account by check, cash, money order or other non-direct deposits, and the interim rule preempts inconsistent State or local garnishment laws and exempts certain federal and state child support garnishments.
The interim rule addresses the common practice of financial institutions that freeze a judgment debtor's account in response to a garnishment without examining whether the account contains exempt federal benefit payments. This practice can leave judgment debtors who receive federal benefits without income or the ability to meet their immediate financial needs.
After May 1, 2011, financial institutions must examine new garnishments within two business days of receipt to determine if the garnishment contains a new Notice of Right to Garnish Federal Benefits (Notice) applicable to certain federal and State child support garnishments. If the Notice is attached to or incorporated into the garnishment, the financial institution should process the garnishment using its customary garnishment procedures without consideration of the provisions of the interim rule regarding federal benefits.
If the garnishment does not contain the Notice, the financial institution should apply the interim rule as follows:
- Conduct an account review within two business days to determine if the judgment debtor is an account holder.
- Determine if a listed federal agency direct-deposited benefits into the account within two months prior to the account review (lookback period). If no federal benefits were direct-deposited into the account during the lookback period, the financial institution should process the garnishment using its customary garnishment procedures.
- If federal benefits were direct-deposited into the account during the lookback period, the financial institution must calculate the "protected amount" under the interim rule. The protected amount is the lesser of the sum of all benefit payments posted to the account during the lookback period or the balance in the account on the date of the account review. The financial institution cannot freeze the protected amount, as it customarily does with accounts in response to a garnishment, and it must grant the judgment debtor full access to the protected amount at all times. If the judgment debtor maintains more than one account, the financial institution must calculate a separate protected amount, if any, for each account.
- The financial institution should follow its customary garnishment procedures for any funds in an account in excess of the protected amount, including freezing the excess funds or paying them into court pursuant to the garnishment order.
- The financial institution should issue a notice to the judgment debtor within three business days stating the name of the creditor, the date of the garnishment, the protected amount, if any, the non-protected amount frozen or paid into court, the account holder's right to challenge the calculation of the protected amount and the garnishment, and the amount of any garnishment fee provided by applicable garnishment statute. The interim rule contains a model form notice for financial institutions that complies with the notification requirements.
The interim rule does not affect a financial institution's ability to set off overdrafts and other account holder debts against the exempt funds, and it does not protect the exempt funds from non-garnishment bank fees. A financial institution that complies in good faith with the interim rule is not liable to the creditor or account holder for contempt, civil or criminal action arising from the garnishment.