Making direct deposit safe for the garnished
The US Treasury pays more money to more people than just about anybody in the world. Last year it disbursed more than $1.6 trillion in 982 million individual payments. As you can imagine, they save a lot of money when they can make direct deposits instead of printing paper checks. So they're always trying to figure out what makes people reject direct deposit. One such thing is garnishment.
Social Security and other "lifeline" payments from the federal government such as veterans benefits, are supposed to be safe from garnishment--they can't be taken away just because you've lost a lawsuit or are behind on your bills. As a practical matter, though, if the recipient lets the money be direct deposited into his or her checking account, access to the money can easily be lost. Even bank accounts that hold only exempt money can be temporarily frozen while the bank sorts out the facts--and if the account has also received money from other sources, some or all of it can be seized. That makes a paper check awfully attractive to people facing garnishment--they can cash their check and get their money, even if their account is frozen.
One solution that the Treasury has come up with for this issue is the Direct Express card. It's a debit MasterCard, set up to receive payments from Social Security and other federal payment systems, that can be used to make ordinary purchases and one cash withdrawal per month for free.
It's primary purpose is to make direct deposit available to people who don't have a bank account. (People in the financial industry call them "the unbanked.") The sweetener for them is that they don't have to pay the fee that a check-cashing place would charge. But the Treasury is also going after people besides the unbanked, such as those worried about garnishment.
With almost 20% of payments still not being made electronically, the Treasury has a strong incentive to figure out what problems are keeping people from choosing direct deposit--and solve them.
I've mentioned before that one of the advantages of having some of your assets in legal compartments such as IRAs and 401(k)s is that they are somewhat protected against being seized if you get over your head in debt, lose a lawsuit, make a mistake on your taxes, get divorced, or otherwise have someone out there with some sort of legal claim on your money.
These different kinds of compartments (and similar ones like pensions, annuities, trusts, insurance, etc.) get these protections by law. The laws differ in specific details, which suggests to me that it makes sense to use more than one kind of special compartment, just in case your particular situation leaves one kind of compartment more exposed than another.
This Direct Express card is another special compartment, not subject to garnishment in most circumstances, and available to anyone receiving federal benefits.
Although it's cheaper than printing paper checks, it's still not as cheap for the Treasury as direct deposit to your regular bank account, so the Treasury is looking to solve the garnishment problem for ordinary bank accounts as well. Among other things, they're working to "provide guidance to financial institutions on how to discern if there are exempt funds in an account and what amount of funds should not be frozen." (That according to Deputy Assistant Secretary for Fiscal Operations and Policy Gary Grippo, testifying yesterday to a House subcommittee.)
If you receive federal benefits, and are subject to garnishment, the Treasury is looking out for you. And, if you're not, the Treasury is trying to save a few dollars of taxpayer money.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author’s alone, and have not been reviewed, approved or otherwise endorsed by any card issuer.