Can your federal benefits be garnished? In today's business climate, that is a fair question. Unfortunately, there isn't a quick answer other than "It depends."
While there is a long list of federal and state benefits exempt from garnishment, most come with an exception. Let’s look at how wages are garnished in general and which assets can be seized or garnished, then we can see which federal benefits are protected.
Explaining Wage Garnishment
If you owe someone money and you don’t pay it on time, that person (now known as a creditor) can sue you in court to win a judgment against you. Then the creditor asks the judge for an order to garnish your assets.
Which of your assets can creditors go after? It depends on the creditor:
- For most creditors, your wages, bank account, and any other assets you may have, including property are fair game.
- If the creditor is the IRS, they can go after the same things, but they don’t have to go to court to do it.
- The US Treasure can garnish your Social Security benefits for unpaid debts such as back taxes, child or spousal support, or a federal student loan in default.
The IRS and the US Treasury can’t take everything you have, fortunately. Only 15% of Social Security is taken for back taxes. However, you may pay as much as 65% for alimony or child support.
A federal student loan delinquency may take up to 15% of the outstanding debt after the first $750 of monthly benefits for non-tax debts.
What Benefits or Assets Are Exempt from Garnishment
In general, Social Security, Supplemental Security Income (SSI), and Veteran’s Affairs (VA) benefits are exempt from garnishment. VA benefits can be garnished for certain child support obligations, but that’s it. Other exempt federal benefits include the following:
- Civil service and Federal retirement and disability
- Office of Personnel Management retirement
- Service member pay
- Military annuities and survivor benefits
- Federal student aid/student loans (the loans themselves)
- Railroad retirement benefits
- Financial assistance from FEMA
- Merchant seaman wages
- Longshoremen’s and Harbor Workers’ Death and Disability benefits
- Compensation for Injury, Death, or Detention of Employees of US Contractors working outside the US
- Foreign Service retirement
- Lump-sum death and Social Security benefits for children (which are exempt even from the 15% limitation)
- Child support you receive
- Most pensions
Other benefits often, but not always, protected from garnishment include Temporary Assistance for Needy Families (TANF), unemployment compensation, and plans set up under ERISA, like 401k’s.
401k benefits are even protected from judgment creditors, partly because they are legally owned by your employer.
Your bank account is partially protected:
- $2,500 is exempt if your only judgment is for private student loan debt.
- $2,000 is exempt if you are being garnished for consumer debt.
- $500 is exempt from all other debts, plus $1,000 additional cash, for a total exemption of $1,500.
Here's something good to know - creditors holding medical bills, personal loans, or payday loans are prohibited from garnishing any federal benefits. It says so in Section 207 of the Social Security Act.
Federal Benefits May Not Be Totally Protected
As we said above, Social Security, SSI, and VA benefits directly deposited into your bank account are protected except for child support and debts owed to the federal government. But your accounts can still be frozen and seized. If you have federal benefits in those accounts, they may be frozen as well.
Everything is controlled by the so-called Final Rule. Issued by the US Treasury Department a few years ago, the Rule requires banks to identify and add up all protected federal benefits that have been directly deposited into an account within the past 60 days. The bank may not freeze those benefits; they must remain available to the account holder.
The bank must notify you what it is doing - you do not need to do anything about it. If your account is below the amount of the garnishment request, the bank can't freeze your assets at all. The bank may not turn over any Social Security, SSI, or VA benefits deposited in the past two months.
Note that this applies to direct deposit funds. If you indirectly deposit federal benefit funds to your account by transferring them from another account, with a check, or using a debit card, you have to quickly request a court hearing to challenge the garnishment order.
Once in court, you have to prove the account to be garnished contains protected federal funds. If you have Social Security, SSI, or VA benefit funds in the account that are older than 60 days, they are still protected, but you need to fill out documentation and/or go to court to get an exemption. It isn't automatic.
Protecting Federal Benefits from Garnishment
The bank is probably the safest place for your money. If you are worried about the possibility that your account will be garnished, you should open two accounts. In one account, place only the protected federal benefits. That makes it easier to identify those benefits when they aren’t mixed in with the rest of your money.
Open a second account for your unprotected assets and spend the money in this account first. Since it's vulnerable to seizure, you want to minimize the amount in it.
Some states (check your local laws) protect a set amount in a bank account regardless of the source of the funds.
If you find yourself in a position of owing a creditor, even if it’s the IRS, try working out an agreement. It’s best to do this the moment you realize you can’t pay in full. Approach the creditor or the entity collecting the debt and try to work out a payment plan or a compromise.
Don’t offer to pay more than your assets are worth. If a collector could only get $500 for a seized asset, don’t offer to pay $4,000 over six months.
Get the agreement in writing and include a clause excusing you from attending a debtor’s examination. The creditor should promise not to use wage garnishment or property seizure to collect as long as you make your scheduled payments.
Can a creditor garnish your federal benefits? For some benefits, the answer is mostly no. If you know you owe back taxes, child or spousal support, or debt to anyone, take action as soon as possible. If you aren’t sure what to do, call Top Tax Defenders. We can help.