Social Security Payments Caught in Illegally Frozen Bank Accounts
New America Media, News Report, Khalil Abdullah Posted: Apr 23, 2009
Editor's Note: Bank account freezes are designed to prevent account holders from withdrawing funds before creditors can collect on legal claims. Some debt collectors, however, often file claims on exempt accounts, which include Social Security and veteran benefits writes NAM editor Khalil Abdullah.
When Ronald Coote went to an ATM in the autumn of 2008 to get the money to fill the prescription for his heart medication, he was stunned to find his funds unavailable.
Coote received a monthly direct deposit into his bank account, a $783 disability check from the Social Security Administration (SSA). Since recovering from open-heart surgery, and with high blood pressure, he was always careful to set aside the cost of medication. The ordeal that followed was almost more than his 60-year-old heart could take.
His Washington Mutual account had been frozen by the bank at a debt collector’s request for non-payment of an old credit card bill. The collector attempted to garnish Coote’s Social Security disability checks, funds that are deemed exempt from collection under federal law. In part, the law reads, “none of the monies paid or payable … shall be subject to execution, levy, attachment, [or] garnishment.” In all but a few instances, such as child support or non-payment of federal taxes, can SSA funds be garnished; even then there are caps to ensure that a person is left with enough to live on.
“I have to have my medication or I die,” Coote said, explaining his decision not to pay the bill. “I have to eat, I have to pay rent, gas, electric. It wasn’t a choice.”
Coote’s situation was far from unique. Margot Saunders of the National Consumer Law Center estimates that “tens of thousands of people every month,” who are elderly or disabled, are being forced into dire financial circumstances. Bank account freezes and illegal garnishments of exempt funds, including veterans’ benefits, are shredding safety nets. In her 2008 testimony before a House Ways and Means Subcommittee on Social Security, Saunders included a long list of stories similar to Coote’s--or worse.
According to SSA, its payments provide baseline financial solvency for 13 million Americans, who would otherwise be in poverty. However, a 2008 report by SSA’s inspector general, estimated that direct-deposit beneficiaries across the United States have incurred $177.7 million in total garnishments. The report did not attempt to estimate the near incalculable damage of bank account freezes.
Bank account freezes are designed to prevent account holders from withdrawing funds before creditors can collect on legal claims. Debt collectors, though, often file claims on exempt accounts.
“The freeze creates a hostage-like situation where the creditor can wait out the debtor by demanding payment,” said attorney Johnson Tyler, director of the Social Security/Consumer Rights Unit at South Brooklyn Legal Services.
Tyler explained that often consumers don’t know SSA funds are exempt and agree to make payments to have the freeze lifted, so they can access their accounts. He suggested the problem might be worse in communities where limited proficiency in English is common.
In 2002, Coote was a mid-level manager at a Western Beef grocery store in the Bronx, when his foot got caught in an uncovered drain at the facility. He fell, and the injury rendered him unable to work.
In addition to two herniated disks, tests confirmed arthritis in the lower part of his spine, a heart ailment, and other debilitating medical conditions. Then in his early 50s, Coote began receiving benefits in 2003. Friends and family members also helped at times.
“Taking money from loved ones, well, it doesn’t make me feel good,” Coote confided.
Last year, Coote complied with the debt collector’s request for three months of his bank statements to show that he was barely surviving financially with SSA funds and should be considered uncollectable. But the collection agency saw that he had deposited non-SSA money, modest personal gifts. The collector claimed Coote’s account was no longer exempt because it included “co-mingled funds.”
Coote contacted Tyler, who convinced the collection agency that, under the Social Security Act, his account could not be garnished. Because Coote had already spent the money by the time the bank had frozen the account, the claim of co-mingled funds was not valid, Tyler told the collection agency. He threatened to sue if the bank did not end the freeze.
‘Debt Collection on steroids’
Because of complications with bank account freezes, varying definitions of co-mingled accounts, or imprecise calculations of exempt funds, consumer rights advocates contend bank freezes and garnishments on accounts, such as Coote’s, are illegal. They argue that the freezes violate the intent and spirit of the federal law’s mandate to provide a floor above the poverty line for Americans.
Collection agencies use computer searches for debtors’ accounts as easily as commercial fishing crews use huge trawling nets to haul in a catch. Using a database and a keystroke, a collector can broadcast an electronic inquiry on a claim to every bank in a state.
“It’s debt collection on steroids,” said Tyler. “Computers are talking to computers.”
In Coote’s case, had the collection agency attempted to seize his account after January 2009, New York’s recently enacted Exempt Income Protection Act (EIPA) would have shielded his funds. EIPA protects up to $1,716, equal to two months of work at the minimum wage, from bank freezes, regardless of the source of funds. If the source of the funds is from Social Security or other exempt sources, such as veterans' benefits, a bank can freeze only funds above $2,500. But New York is only one of a handful of states that offers this protection.
Earlier this year, the National Academy of Social Insurance (NASI) in Washington, D.C., triggered interest in the issue by publishing an analysis of the barriers to protecting vulnerable Social Security recipients from abuses of the rules. The article noted that the five entities responsible for banking oversight are currently hashing out the details of best practices. Others, though, said the squabbling among the group is impeding a regulatory consensus that might resolve the issue. (New America Media did not receive a reply to its inquiry from the U.S. Treasury Department, which is reportedly coordinating this effort.)
The author of the NASI paper, John Infranca, criticized the “patchwork of state regulations” that continually produces inconsistent results. He called for federal legislation to settle the issue.
However, a Capitol Hill staffer on the Senate Committee on Aging spoke to New America Media about proposed legislation. The committee’s chair, Sen. Herbert Kohl, D-Wis., sponsored the Illegal Garnishment Prevention Act in 2008. But the legislation stalled during last year’s election cycle. The bill would prohibit SSA from promoting the use of direct deposit accounts until they are better protected.
Kohl will reintroduce the bill, said the committee staffer, but Congress is not wedded to any particular solution and would actually prefer a regulatory fix from the five banking agencies.
Sybil Hebb, an attorney at the Oregon Law Center, is not waiting for Congress or the regulators. She is lobbying Oregon’s legislature to enact a law similar to California’s or New York’s EIPA. “The money is really important to our clients because it’s their only source of income,” Hebb stated. She knows of cases where “all of the money taken was exempt,” adding that often “clients have to file a claim to get the money back.”
Few states have directly addressed the issue. In others, class action suits have been filed or individual lawsuits have been successful against some collection agencies and banks. Consumer rights advocates are hopeful that banks may now be more receptive to a solution that would bring countrywide uniformity.
Tyler contended that profit has been at the heart of the banking industry’s reluctance to adhere to Social Security Act provisions. Computerization has invalidated the previous assertion of banks that they couldn’t distinguish exempt funds from others, Tyler said.
Also, Tyler noted, banks impose fees on their customers for freezes ordered by state courts and collect bounced-check fees for checks presented to frozen accounts.
“Don’t forget that banks are the issuers of credit cards,” he said. “They want to be able to collect those fees as well.”
Direct deposit: good and bad
Ironically, SSA has saved the public millions of dollars in administrative costs by using electronic deposits, rather than mailing paper checks.
The administration’s Web site touts the convenience and security of direct deposit: “Both you and your money are safe.” But, when a bank freezes an account, deposits that arrive are also unavailable. A paper SSA check, on the other hand, can be taken to a bank and cashed whether an account is frozen or not.
J.P. Morgan Chase bought Washington Mutual in 2008 for $1.9 billion. It has made at least $100 of that outlay back, the fee it charged Coote for the freeze imposed on his account. Coote claims that he was never informed that his Washington Mutual overdraft protection had been terminated. Without overdraft protection, J.P. Morgan Chase charged Coote another $34 for a bounced check he had written, unaware that his account had been frozen.
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