The new U.S. Treasury rule requires all banks to determine whether an account contains these protected funds. If an account contains protected funds, the bank is required to protect two months' of benefit payments from garnishment. Protection of more than two months' of benefit payments requires additional court filings and in practice, makes these funds immune from seizure by creditors.
New Rules: How Does It Work
It works like this. If you fail to pay your car payment and the dealership repos the car, then sues and gets a judgment against you for the remainder of what you owe. Dealership or financing company then goes to the bank and attempts to garnish your money. Under the new rule, the creditor can pick any day they want for the garnishment and the bank must respond by looking at your account for the previous 60 days. Let's say you received a $1,100 Social Security payment one month and another $1,100 Social Security payment the next month. That $2,200 is protected. If there is any other money above and beyond that amount that has been deposited in the account during that period and is still sitting there, the creditor gets it. If there is no other money, the creditor is out of luck.
Uncle Sam & Child Support Exceptions
There are two exceptions, Saunders says: money you owe Uncle Sam and money you owe in child support. If you have these kind of debts, an attorney or the IRS can petition Social Security directly and collect.
New Law Closes Loopholes for Creditors
If a debt collector objects, there is a crystal clear statement on the Social Security website. Garnishment of Social Security has always been against the law, but creditors have found ways around it. This change in the rule should eliminate those loopholes.
HOT TIP: If you fear you might find yourself in this kind of debt-collection dilemma during your retirement, the best way to protect yourself is to have your Social Security check deposited into an account that you don't use for anything else.
Additional resources provided by the author
Note: If a creditor other than the federal government tries to garnish your Social Security benefits, inform them that such an action violates Section 207 of the Social Security Act (42 U.S.C. 407).
Section 207 bars garnishment of your benefits. It can also be used as a defense if your benefits are incorrectly garnished. Our responsibility for protecting benefits against garnishment, assignments and other legal processes usually ends when the beneficiary is paid. However, once paid, benefits continue to be protected under section 207 of Act as long as they are identifiable as Social Security benefits.