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Be Wary If Bank Takes Federal Benefits

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The Tampa Tribune

Published: July 20, 2008

The reports just keep coming that consumers are still having difficulty paying their debts.

One of the latest is from the Consumer Credit Delinquency Bulletin of the American Bankers Association. The bulletin found the percentage of home equity lines of credit that were more than 30 days past due rose 14 basis points to 1.10 percent during the first quarter. This was the highest recorded rate for this category since 1997. Bank card delinquencies rose 13 basis points to 4.51 percent. Auto and personal loan delinquencies also increased.

"It was a tough quarter for some people," said James Chessen, the ABA's chief economist. "Faced with rising food and gas prices and little income growth, fewer resources have been available to manage debt."

As many people struggle to pay for necessities, they skip making debt payments. Many creditors in turn are seeking relief by taking borrowers to court. But in some cases the actions of the financial institutions in carrying out court orders are questionable, according to a new report out by the Social Security Administration's Office of the Inspector General.

Protected Funding Garnished

The inspector general found that some financial institutions are apparently violating federal law by garnishing accounts that receive electronic deposits of Old Age, Survivors and Disability Insurance, and/or Supplemental Security Income payments. This money is supposed to be protected from creditors except under certain conditions.

"Millions of beneficiaries rely on Social Security benefits as their only source of income for basic needs such as housing and food," the inspector general's report said. "When a creditor's garnishment order is enforced and these federal funds withheld, the lives of a vulnerable segment of the population are placed at risk."

Last summer, Sens. Herb Kohl, D-Wis., Max Baucus, D-Mont., and Claire McCaskill, D-Mo., asked the inspector general to investigate what they thought was a widespread practice of improperly deducting service fees and garnishments from beneficiaries' direct-deposit accounts.

"We need our banking regulatory agencies to start enforcing the law," Kohl said in a statement after the release of the IG report.

During a 12-month period beginning September 2006, the 12 largest banks took $1 million from accounts that held only government benefits. Another $29 million was taken from accounts that held money from government benefits that was commingled with cash from other sources, according to the report. The inspector general also found in some cases that banks were charging legal processing fees, overdraft charges or insufficient fund charges that occurred as the result of a garnishment.

Nessa Feddis, senior counsel for the American Bankers Association, said the banks are just obeying court orders. Feddis said in many cases if the banks don't comply, they could face fines.

The problem is that you have a set of state and federal laws that are conflicting, Feddis said.

5 Exceptions To Benefits Rule

A financial institution can take protected government benefits only under the following five conditions, according to the Social Security Administration:

•To collect child support and/or alimony obligations.

•To collect unpaid federal taxes as the result of an IRS levy.

•If the government beneficiaries elect to have a percentage of benefits withheld and paid to the IRS to satisfy federal income tax liability for the current year.

•To pay a federal agency a non-tax debt.

•To collect overdue federal tax debts by levying up to 15 percent of each monthly payment until the debt is paid.

Michelle Singletary can be reached at The Washington Post, 1150 15th St. N.W., Washington DC 20071.

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