Creditors Garnishing Protected Funds

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

One of the latest is the Consumer Credit Delinquency Bulletin from the American Bankers Association. The bulletin found that the percentage of home-equity lines of credit that were more than 30 days past due rose 14 basis points, to 1.1 percent, during the first quarter (seasonally adjusted). 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 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 of questionable legality, according to a new report by the Social Security Administration's Office of the Inspector General.

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. These funds are 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 says. "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 inspector general's report was released.

During a 12-month period beginning September 2006, the 12 largest banks took $1 million from accounts that held only government benefits. An additional $29 million was taken from accounts that held government benefits money mixed 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-funds charges as the result of a garnishment.

Although the sample size in this investigation was relatively small, the inspector general's report concluded that if all financial institutions followed the pattern of those investigated, as much as $177.7 million in garnishments could be attributable to beneficiaries receiving direct deposit of Social Security benefits.

"These recipients do not have enough money to live on, and that is why current law prohibits such garnishments. It is outrageous that such garnishments are occurring," Baucus said.

Nessa Feddis, vice president and senior counsel for the American Bankers Association, said the financial institutions aren't acting heartlessly by taking or freezing funds from people receiving government benefits. Instead, she said, the banks are just obeying court orders. Feddis said that in many cases if the banks don't comply, they could be punished with heavy fines.