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Private Garnishment Can Cut Some Stimulus Payments

Posted on Apr. 17, 2020

Congress should clarify that banks must treat economic stimulus payments as benefits exempted from private garnishment by federal law, the American Bankers Association told congressional leaders.

Complaints that military-oriented financial services company USAA was seizing customers' stimulus payments to cover their existing debts led the company to reverse its policy April 16, according to Military Times. Millions more Americans have complained that stimulus money they expected to be deposited into their accounts was missing, misdelivered, or miscalculated, The Washington Post reported April 16.

But at least as far as banks’ garnishing accounts for private debt, that practice is allowed under the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136), the bankers association said in an April 15 letter to House Speaker Nancy Pelosi, D-Calif., and Senate Majority Leader Mitch McConnell, R-Ky.

Congress exempted these [stimulus] payments from offset for debts owed to federal and state agencies, except in the case of child support, but did not exempt them from court-ordered garnishment to pay creditors,” the letter said. “Unless Congress takes action to provide legal certainty, banks are legally required to provide garnishments to third-party creditors.”

Between Banks and Customers

“What the banks do with the funds after deposit is a matter between them and their depositors,” Carlton Smith, former director of the Benjamin N. Cardozo School of Law Tax Clinic, told Tax Notes April 16. 

The CARES Act “did not try to tell banks not to take the stimulus money,” Smith said. “The legislation did not try to override contracts between banks and their customers.”

Some Democrats would like to change that. Rep. Judy Chu, D-Calif., a member of the Ways and Means Committee and chair of the Small Business Subcommittee on Investigations, Oversight, and Regulations; Rep. Joseph D. Morelle, D-N.Y.; and 68 other lawmakers sent an April 16 letter to Treasury Secretary Steven Mnuchin, asking him to use section 2201(h) of the CARES Act to prohibit financial institutions from garnishing stimulus payments.

Chu and Morelle's letter cited a report that said a Treasury Bureau of Fiscal Service official told bankers during an April 10 conference call that they could garnish stimulus payments for outstanding debt.

“Reports that a loophole may allow banks to seize and redirect that payment to pay off debt are not only troubling, but run directly contrary to the intent of the legislation,” Morelle said in a statement that accompanied the letter.

Smith was skeptical. “I think Congress could change this, but I doubt it will,” he said. Further, because half of the payments have already been deposited, “I don't think Congress should change the rules at this point,” he added.

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