Creditors who have obtained a court order generally can seek to garnish money in a bank account. However, federal law protects certain government benefits from garnishment. Social Security Disability benefits, Supplemental Security Income and VA benefits are all protected from garnishment.

Recipients of government benefits have been having difficulty with their bank accounts despite the federal protection. When a judgment creditor submits a garnishment order to a financial institution, the bank often freezes the bank account for a period of time. The frozen account could include funds protected from garnishment. An individual that has Social Security benefits in the account cannot access the funds during the time the money is frozen, which can cause significant hardship.

The Department of Treasury, Social Security Administration, Department of Veterans Affairs and other government agencies recently released an interim final rule that will implement new restrictions on freezing accounts that have protected government benefits directly deposited into the account. The interim final rule will take effect on May 1, 2011.

The rule sets up procedures for financial institutions to follow for accounts that receive protected government benefits by direct deposit. The credit union or other banking institution will be required to review accounts within two business days of receiving a garnishment order.

The bank will have to determine the total amount of protected funds that were deposited from Social Security or Veterans Affairs and other qualified government benefits programs during a two-month period. The financial institution will not be able to freeze funds equal to the amount of government benefits received during the two-month period or the total current balance, whichever amount is the lower of the two.

The new rule will also require the bank to notify the account holder of the protections from garnishment that apply to government benefits. The bank will have to send the information to the account holder within two business days of the completion of the account review.

Source: ACA International, "Garnishment Interim Final Rule Affects Financial Institutions," 2 Mar 2011