Advocates warn stimulus checks could be garnished by creditors

While the federal government won’t seize stimulus checks being deposited into Americans’ bank accounts this week for owed debts, private debt collectors might, consumer advocates are warning.

As part of the Coronavirus Aid, Relief and Economic Security Act, or CARES Act, signed by President Donald Trump on March 27, millions of Americans will receive a stimulus check in the coming weeks.

For taxpayers who have direct deposit information on file with the Internal Revenue Service, the payments should go out this week.

Hoosiers can expect to receive $1,200 per adult and $500 per child if their 2019 or 2018 adjusted gross income falls below $75,000 for a single adult or $150,000 for married couples.

The payments are coming as millions of Americans have been laid off work amid the COVID-19 pandemic. Many are suddenly unable to pay rent or mortgages, buy groceries and more.

And while the CARES Act prohibits the government from garnishing stimulus checks for debts owed to the federal or state government, such as unpaid taxes or student loans, there’s no federal provision prohibiting private debt collectors from trying to seize the money for debts owed on outstanding court judgments. The checks could also be garnished for overdue child support.

The Indiana Institute for Working Families has asked Gov. Eric Holcomb to issue an executive order that imposes a moratorium on any new garnishment or attachment orders; to stay enforcement of any existing attachment/garnishment of bank accounts; to prohibit state chartered financial institutions from seizing stimulus checks to repay a debt owed to them; and to clarify that stimulus checks are exempt under existing state law and the garnishment of such funds in an “unfair and deceptive practice.”

Previously, legal aid providers and nonprofits that help the poor asked the Indiana Supreme Court to protect vulnerable households from having their federal stimulus checks seized by creditors.

Erin Macey, senior policy analyst for the Institute for Working Families, told IBJ that families are struggling to bring in money right now, and it’s taking time for unemployment benefits to get worked out. They desperately need the stimulus checks.

“These stimulus checks are coming at really important time for families to meet their basic needs,” she said. “Families need to be able to decide how to use this money. This is really a major, major event, and one that, I think, calls for really unprecedented actions of protection for families,” she added.

The institute has published a poll on its website to receive feedback from Hoosiers families on how they plan to use the money and whether it’s enough. Responses so far have been mixed, Macey said.

Many people need it for very basic, immediate needs. But others plan to stash the money away in case of an emergency, such as being laid off, for example.

On Monday night, Holcomb’s office told IBJ it was looking into the institute’s request.

Some states are already taking action. In Ohio, for example, the state’s attorney general has already warned creditors that state law protects the checks from being garnished. The attorney general in Massachusetts has also issued guidance suggesting the checks are protected under state law.

On the federal level, some members of Congress have asked the U.S. Treasury to take action to protect the checks from debt collectors.

Under current treasury rules, two months of Social Security, Supplemental Security Income and other federal payments are protected from being garnished by private debt collectors. The treasury could apply that same rule to the stimulus checks.

“If Treasury fails to take action, the CARES Act direct payments are at risk of being seized by debt collectors,” U.S. Sens. Sherrod Brown, D-Ohio, and Josh Hawley, R-Missouri, wrote in a letter to Department of Treasury Secretary Steven Mnuchin. “That is not what Congress intended. We came together to pass the CARES Act to help American families pay for food, medicine and other basic necessities during this crisis.”

So far, no action has been taken at the federal level.

The National Consumer Law Center, a Boston-based not-for-profit that specializes in consumer issues on behalf of low-income people, said millions of Americans have court judgments against them, and many may not know it. And creditors may already be lining up to obtain court garnishment orders to seize stimulus deposits and any other amounts.

Banks that are presented with a garnishment order are likely to freeze bank accounts to give consumers a short time to contest the order in court, but with many courts across the country currently closed, fighting the order could be near impossible, the NCLC said.

The center recommends Americans worried about garnishment monitor their accounts for the payment and consider moving the money out as soon as possible. The funds could be withdrawn in cash or loaded onto a prepaid debit card.

“These actions may, however, make it more difficult for consumers to use their funds or cause them to pay prematurely for bills that should be delayed,” the center said. “Whether to move funds from a bank account will be a difficult decision, in large part based on how real the risk of garnishment is if they are left in the account.”