A new federal rule that seeks to protect judgment debtors' federal benefit payments from attachment by a creditor will require banks and credit unions to change their handling of garnishments of their customers' accounts. Effective May 1, 2011, the U.S. Treasury and other federal agencies issued new regulations (the Rule) that federal financial institutions1must follow when they receive garnishment writs or child support orders for account holders who receive certain federal benefit payments, including:
• Social Security
• Supplemental Security Income
• Veterans Administration
• Federal Railroad Retirement
• Federal Railroad Unemployment and Sickness
• Civil Service Retirement System
• Federal Employee Retirement System
Unless a financial institution receives a notice from the applicable federal agency to the contrary, these benefits remain protected under federal law from garnishment and the claims of judgment creditors.
If a judgment creditor seeking to attach a deposit account is the United States or a state child support enforcement agency, the financial institution must check the applicable writ or order to determine if the United States or state child support agency has attached a "Notice of Right to Garnish Federal Benefits" in the form attached to the Rule. If the notice is attached, any federal benefit payments may be garnished or attached, and the financial institution may follow its customary procedures for processing garnishments. If no such notice is attached, federal benefit payments are protected and are not subject to attachment or garnishment.
Under the new Rule, when a financial institution receives a writ or court order for a customer's account, the institution must perform an account review not later than two business days following receipt of:
a. the writ or order; and
b. sufficient information from the creditor that initiated the order to determine whether the debtor is an account holder.
The purpose of the account review is to determine the amount of the federal benefit payments that have been deposited into the depositor's account within the two-month period commencing on the date that is two months prior to the date of the account review (the look-back period).2
The amount of the federal benefit payments deposited within this two-month look-back period is considered the protected benefits (protected benefits or protected amount) and not subject to attachment. The depositor is entitled to unfettered access to and the use of the lesser of the amount of the protected benefits or the account balance, as of the date of the account review. If the amount of the account as of such date is less than the protected amount, then the entire current amount of the account must be made available to the depositor.
During the two-day period from the date the writ or order is received until the account review is performed, the financial institution may take no action with respect to the attached account. Thus, while banks traditionally placed an immediate hold on the garnished account, they are now prohibited from freezing an account until the account review is performed.
Fortunately, the Rule provides a safe harbor for financial institutions that comply in good faith with the Rule. Thus, for example, if a financial institution made the protected amount available to an account holder in accordance with the Rule, the financial institution would not be liable even if a judgment creditor were able to establish in court that funds in the account at the time the garnishment order was served were attributable to nonexempt deposits.
In addition, if a financial institution performed an account review within the two-business-day deadline and funds were withdrawn from the account during this time, the financial institution would not be liable to a creditor or court for failure to preserve the funds in the account, even if there were no protected amount for the account.
With respect to fees for processing a garnishment for an account containing a protected amount, the financial institution is permitted to collect a garnishment fee only against funds in the account in excess of the protected amount on the date of the account review, and only if the financial institution customarily charges its other account holders a garnishment fee of the same nature and in the same amount. Garnishment fees may still be levied against unprotected funds in the account.
The Rule also preempts any state laws that allow for continuing garnishments (i.e., garnishing funds that are deposited into the garnished account after the date of the writ or order) and prohibits a financial institution from freezing funds deposited after the account review. Accordingly, if the garnished account contains federal benefit payments deposited during the look-back period, the financial institution may no longer freeze any funds deposited into such account after the account review is performed, and the financial institution will supply the account balances for answers to interrogatories as of the date the writ or order is received.
The foregoing change regarding continuing garnishments relieves financial institutions from having to monitor on an ongoing basis garnished accounts that contain federal benefit payments. Creditors will now have to seek a new garnishment order against the same account in order to execute against additional funds deposited after the date of the account review.
The Rule requires that financial institutions must provide the affected account holder with a notice of the garnishment within three business days of the account review. The Rule provides a form of letter that can be adapted to the specific financial institution. The notice must briefly explain what a garnishment is and must also include other information regarding the account holder's rights. There is no requirement to send a notice if the balance in the account is zero or negative on the date of account review.
Enforcement of the Rule rests with the applicable federal banking agency. Additionally, the Rule specifies a two-year record-retention period with respect to records relating to compliance with the Rule.
While the Rule does not state what the liability is for failure to comply with its provisions, presumably a financial institution that failed to comply with the Rule and released protected federal benefit payments would be liable to the account holder for the amount of federal benefit payments improperly released to a judgment creditor.
Banks, credit unions, savings associations and others engaged in the business of banking must now revise their procedures and update employee training so that staff understand the new Rule and how to handle garnishments and orders attaching accounts thereunder. 1 The Rule defines a "federal institution" as a bank, savings association, credit union or other entity chartered under federal or state law to engage in the business of banking.
2 Specifically, the look-back period is defined as the two-month period beginning on the date immediately preceding the date on which the account review must commence and ending on the corresponding date of the month two months earlier (e.g., if the account review date is April 2, the look-back period begins on Feb. 1 and ends on April 1).
Published July 1, 2011.
