Making direct deposit safe for the garnished

By Philip Brewer. Last updated 1 April 2016. 7 comments
Photo: Philip Brewer

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.

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Guest's picture

It's a fine idea for those who don't have bank accounts. Although I don't think marketing it to those who are trying to avoid being garnished sends a good message. They're obviously being garnished for a reason.

Philip Brewer's picture

The overwhelming majority of garnishments are being done for a reason, but I think that still falls a bit short of it being "obvious" that there's a reason.  I've personally known people who've had money seized in error.  They eventually got the money back (without interest), after proving that they didn't owe it, but it obviously would have been more convenient if it hadn't been taken in the first place.

More fundamentally, though, Congress has written rules for what can be taken in a garnishment and what can't--and it has decided that Social Security payments can't be taken (except to pay federal tax debts and certain child support and alimony payments).  If you're an elderly or disabled person living on Social Security, you have a legal right to that money--even if you have some old debt or have lost a lawsuit.  Obviously, it would be better to get those old obligations sorted out (through bankruptcy, if there's no other way).  In the meantime, though, your Social Security payments may be all that's keeping you housed and fed.

Finally, the Treasury's point of view is simply that it needs to carry out the will of Congress (as expressed in statue) at the lowest possible cost to taxpayers.  It costs a lot more to print a paper check than it does to send a direct deposit, and if fear of garnishment is what makes a bunch of people demand paper checks, any workaround that's cheaper than paper checks is a win for taxpayers.

Guest's picture

This is one of the best ideas that the government has had in a long time. Cutting costs is essential to being as efficient and having as much control over your money as possible. It is important that they watch out for loopholes right now. Especially for garnishment.

Fred Lee's picture

I've never had my wages garnished, at least not yet, but have found that there are many people who are simply set in their ways and can't fathom the idea of not getting a tangible paycheck in their hands. It's a very old-fashioned way of thinking, but I can understand the psychology of it all. Even still, there are so many advantages to direct deposit, with convenience being the most significant one.

I recall some banks or employers offering incentives to switch to direct deposit, like savings on fees. Also, you get more immediate access to your cash, which is often deposited earlier than when paychecks are disbursed. 

Nice informative article. I never gave much consideration to the garnished, until now. It makes sense.

Guest's picture

psst...Philip...Social Security payments can also be taken for student loans in default.

Guest's picture
Guest social security check can not be garnished for student loans. I know cause my husband has had an outstanding student loan and they can not take any.

Guest's picture

can my ssi check be taken from a judgment that i got ccause i was not able to appear on the date it was handled?