Until now, unless a bank, such as Third Federal, took it upon themself to help out veterans and other recipients of federal payments, any bank account could be frozen. A new rule has changed that. Veterans are not getting off “scot-free” but they are being protected from undue hardship. Often, when an overdue credit account is sold to a collector, the collector places a garnishment request with a bank, which can result in the veteran’s accounts being frozen. Anyone who has ever had their bank accounts frozen, for any reason, knows that this causes an incredible amount of stress. A frozen account means there is no money for food, gas, legal fees, rent or mortgage payments, or utility payments. It’s safe to assume that not being able to pay for this list of essentials qualifies as undue hardship. It’s even a catch – 22. If you cannot buy gas to get to work, you won’t get paid, then how does the creditor expect to get their money?
A new rule from the U.S. Treasury changes this. Banks are now required to analyze every account for which a garnishment or freezing order is received. If that account has no federal benefits payments, such as veterans disability or pension payments, or social security payments, then garnishment or freezing can proceed as normal. If that account does have these funds though, the bank must further analyze how much is two months worth. These two months worth of funds are safe. A veteran can continue to access this amount from their bank account. Any amount over this, though, is available for garnishment.
As will all rules, there are exceptions. Several types of credits which can be paid with federal benefits that would otherwise fall under the protected amount. These are:
Any money owed to the U.S. Treasury. Examples are taxes or student loans.
Child support payments owed to enforcement agencies, but not payments owed to private collection agencies.
Money owed to the bank which holds the account. Examples of this might be overdraft fees or credit card bills.
The hope with this new rule is that the hardship created by harshly frozen accounts will be greatly alleviated, creating a little more peace of mind to people who live on fixed incomes, especially those whose only source of income is the federal payments. Additionally, as with all good things, there are some consequences. Banks are being required to take more time, and commit more employee resources to the processes of garnishment and freezing of accounts. This is likely to be passed on to consumers in rising fees or interest rates. This new rule went into effect May 1st, 2011.
Photo thanks to thinkpanama under creative common license on Flickr.