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Protecting Clients’ Money: New Rules on Garnishment of Exempt Federal Benefits.

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Presentation on theme: "Protecting Clients’ Money: New Rules on Garnishment of Exempt Federal Benefits."— Presentation transcript:

1 Protecting Clients’ Money: New Rules on Garnishment of Exempt Federal Benefits

2 New Treasury Rule Protects Exempt Benefits from Garnishment New federal rule limits creditors’ ability to garnish bank accounts that contain certain electronically deposited exempt federal benefits The rule can be found at 31 CFR Part 212 Effective May 1, 2011

3 Benefits Protected The new federal rule applies to the following exempt federal benefits (if electronically deposited):  Social Security  Supplemental Security Income (SSI)  Veteran’s Benefits  Federal Railroad Retirement, Unemployment & Sickness Benefits  Federal Civil Service & Employee Retirement Benefits It does not apply to exempt state benefits

4 Covers All Depository Institutions All depository institutions must comply with the federal rule, including: State and federal banks State and federal credit unions Any other entity that is chartered to engage in banking

5 Review of Current Maryland Garnishment Rules Creditor obtains judgment Creditor requests a writ of garnishment (Rules & 3-645) Court Issues a Writ of Garnishment to “Garnishee” (usually a bank) Notice mailed “promptly” to judgment debtor by creditor Bank must freeze account until further order of court

6 Current Law, continued Bank must file answer to writ within 30 days and send copy to debtor Creditor has 30 days to respond to answer Court then enters judgment, usually against the bank, ordering it to turn over funds in account to the creditor Debtor must file claim for exemption within 30 days of service on bank (Rules (i) & 3-645(i)) in order to protect the money from creditor

7 Current Law, part 3 If Debtor claims exemption (under federal law or using state exemptions in Courts & Judicial Proc. Sec ): Account remains frozen until court rules on exemption claim Length of time for court to rule varies, but it is supposed to be “promptly” (Rules & 3-643) Due process implications if court takes too long (more than 2-4 weeks) See, Reigh v. Schleigh, 784 F.2d 1191 (1986).

8 How the New Federal Rule Works – Step 1- Account Review Within 2 business days of when a bank receives a writ of garnishment, it must review all accounts of the debtor to determine if any of exempt federal benefits were electronically deposited into the account during the prior two months (the “lookback” period). 31 CFR If Yes, proceed to Step 2 If No, the bank will process the garnishment following requirements of state rules

9 How the New Federal Rule Works – Account Review, continued When performing the account review, the bank must ignore: The presence of other funds that may be in account and co-mingled with exempt funds The existence of a co-owner on the account The existence of benefit payments to multiple beneficiaries; and/or under multiple programs The balance in the account, if more than zero 31 CFR 212.5(d)

10 How the New Federal Rule Works – Account Review, part 3 The account review is done separately for each account in the name of the debtor If the account holder transfers exempt funds from the account into which it was electronically deposited to another account, it will not be a “protected amount” under the rule. The bank has no obligation to trace the movement of the funds from one account to another. The account holder will need to file a claim for exemption if money transferred to another account. 31 CFR 212.5(f)

11 How the New Federal Rule Works - Step 2 – Calculate Protected Amount If exempt funds are in the account, the bank must calculate the “protected amount” The “protected amount” is the sum of all exempt benefits electronically deposited into the account during the prior two months or the balance in the account, whichever is less

12 How the New Federal Rule Works - Step 2 – Example Example: $1,200 in Social Security benefits was electronically deposited into Mrs. Jones’ account in the prior two months. The balance in the account on the date of account review is $800. $800 is the “protected amount.”

13 How the New Federal Rule Works – Step 3 – Do Not Freeze Protected Amount The bank must allow the account holder full and customary access to the protected amount 31 CFR 212.6(a) It cannot freeze or hold the protected amount at any point in the process The bank will freeze any amount in the account over the protected amount

14 How the New Federal Rule Works – Step 2 - Example Example: $1,200 in Social Security benefits was electronically deposited into Mrs. Smith’s account in the prior two months. The balance in the account on the date of account review is $1800. The additional $600 was deposited 3 months ago and is not automatically protected. $1200 is the protected amount. Mrs. Smith must file a claim for exemption for the $600 that is not automatically protected.

15 How the New Federal Rule Works – Step 4 – Notice to Account Holder The bank must send notice to the account holder describing what the bank has done and providing basic information about the garnishment process. 31 CFR The rule contains a model notice for banks to use. 31 CFR 212, App. A

16 How the New Federal Rule Works – Exceptions for Certain Debts The provisions of the new federal rule do not apply if the creditor is The federal government, or A state IV-D child support agency, and The garnishment order contains a special notice that they are exempt from this rule. If the notice is not included, the federal rule applies. 31 CFR 212.4

17 How the New Federal Rule Works – Debtor needs to take no action to keep protected amount The protected amount is automatically protected – the debtor does not need to take any action. 31 CFR 212.6(a) The debtor will need to file a claim for exemption for any amount over the protected amount. Social Security and other federal benefits are still exempt, even if they are not part of protected amount, but a claim for exemption needs to be filed. 31 CFR 212.8(a)

18 How the New Federal Rule Works – Lump Sum Benefits The rule contains no cap on the amount of benefits that are protected. If the account holder received a large lump-sum benefit during the prior 2 months, the whole amount is automatically protected. If the lump sum was received 3 months ago, or more, it will not be automatically protected and a claim for exemption must be filed in state court.

19 How the New Federal Rule Works - No Continuing Garnishments The bank is required to look at the balance of the account on the date of account review and determine the protected amount as of that date. The bank is not to consider or freeze any funds that come into the account after the date of account review. If the same writ of garnishment is served on the bank a second time, the bank is to ignore it. If a new writ of garnishment is served, the bank must perform a new account review.

20 How the New Federal Rule Works – Limits on Bank Fees The bank may not charge a garnishment fee against a protected amount. The bank may not charge a garnishment fee after the date of account review. 31 CFR 212.6(h)

21 How the New Federal Rule Works – What if debtor wants to pay the debt? The bank may pay the protected amount over to the creditor if the bank receives a written statement from the account holder, dated and provided to the bank after the date the garnishment order was served on the bank. 31 CFR (d)(3)

22 How the New Federal Rule Works – Banks Protected A protected amount established by the bank is “conclusively considered to be exempt from garnishment under law.” 31 CFR 212.6(c) Banks who act in good faith to comply with this rule are not liable to creditors, or for penalties under state law or for contempt of court for failure to honor a garnishment order. Banks who act in good faith are not liable to account holder for any frozen amount.

23 How the New Federal Rule Works – Enforcement Federal banking agencies will enforce compliance with the rule. 31 CFR Account holder can file complaint with agency

24 Inconsistent State Law Preempted The federal rule preempts inconsistent state law. 31 CFR 212.9(a) The federal rule is inconsistent with MD Rules to the extent that MD requires: A bank to freeze or hold the protected amount and to pay it to the judgment creditor A bank to hold or turn over any subsequently deposited funds to the creditor (until judgment) A debtor to affirmatively file a claim for exemption for the protected amount

25 New Maryland Rules – & New Maryland Rules adopted by the Court of Appeals, effective May 1, 2011 Govern garnishment of accounts in financial institutions when 31 CFR Part 212 applies Changes both circuit court and district court rules Adopts the definitions set out in 31 CFR Existing Rules & apply to garnishments under the new rules except to the extent that they are inconsistent with the new rules – then the new rules prevail.

26 New Maryland Rules – Content of Writ of Garnishment The Writ of Garnishment must direct the financial institution: Not to hold property of the debtor that is a protected amount Not to hold property that may come into the account following service of the writ To comply with the requirements of 31 CFR Part 212

27 New Maryland Rules – Content of Writ of Garnishment, cont. The Writ of Garnishment must notify the debtor: Some benefits may be automatically protected from garnishment and will not be held Any claim for exemption for a non- protected amount must be filed with the court not later than 30 days after service of the writ of garnishment on the bank.

28 New Maryland Rules – Answer of Garnishee The answer of the garnishee (the bank) must state, if applicable: That a protected amount is in the account, but need not specify the dollar amount If there is a non-protected amount in the account and the amount of the non-protected funds. If the account contains only protected funds, the garnishee shall request a judgment in favor of the garnishee terminating the garnishment.

29 Advising Clients The federal rule only applies to electronically deposited benefits. If clients receive paper checks and then deposit them – they will not be automatically protected. Amounts over and above the protected amount will not be automatically protected, so a claim for exemption will need to be filed. Clients should not transfer funds from one account to another, as they will lose their automatically protected status.

30 Example #1 – The “Lookback Period” Account review performed same day garnishment order is served: A financial institution receives garnishment order on Wednesday, March 17. The financial institution performs account review the same day on March 17. The lookback period begins on Tuesday, March 16, the date preceding the date of account review. The lookback period ends on Saturday, January 16, the corresponding date two months earlier.

31 Example #2 – The Lookback Period No corresponding date two months earlier: A financial institution receives garnishment order on Tuesday, August 30. The financial institution performs the account review two business days later on Thursday, September 1. The lookback period begins on Wednesday, August 31, the date preceding the date of account review. The lookback period ends on Wednesday, June 30, the last date of the month two months earlier, since June 31 does not exist to correspond with August 31.

32 Example #3 – The Lookback Period Weekend between receipt of garnishment order and account review: A financial institution receives garnishment order on Friday, December 10. The financial institution performs the account review two business days later on Tuesday, December 14. The lookback period begins on Monday December 13, the date preceding the date of account review. The lookback period ends on Wednesday October 13, the corresponding date two months earlier.

33 Example #1 – Protected Amount Three benefit payments during lookback period: A financial institution receives a garnishment order against Mr. Williams for $8,000 on December 2. The date of account review is the same day, December 2, when the opening balance in the account is $5,000. The lookback period begins on December 1, the date preceding the date of account review, and ends on October 1, the corresponding date two months earlier. The account review shows that three Federal benefit payments were deposited to the account during the lookback period totaling $4,500, one for $1,500 on December 1, another for $1,500 on November 1, and a third for $1,500 on October 1. Since the $4,500 sum of the three benefit payments posted to the account during the lookback period is less than the $5,000 balance in the account at the open of business on the date of account review, the financial institution establishes the protected amount at $4,500 and freezes the remaining $500 in the account.

34 Example #2 – Protected Amount Benefit payment on date of account review: A financial institution receives a garnishment order against Mrs. Pierce for $5,000 on Thursday July 1. The date of account review is the same day, July 1, when the opening balance in the account is $3,000, and reflects a Federal benefit payment of $1,000 posted that day. The lookback period begins on Wednesday, June 30, the date preceding the date of account review, and ends on Friday, April 30, the corresponding date two months earlier. The account review shows that two Federal benefit payments were deposited to the account during the lookback period totaling $2,000, one for $1,000 on April 30 and one for $1,000 on June 1. Since the $2,000 sum of the two benefit payments posted to the account during the lookback period is less than the $3,000 balance in the account at the open of business on the date of account review, notwithstanding the third Federal benefit payment posted on the date of account review, the financial institution establishes the protected amount at $2,000 and places a hold on the remaining $1,000 in the account.

35 Example #3 – Protected Amount Account with co-owners with benefit payments : A financial institution receives a garnishment order against Mr. Carter for $3,800 on March 22. The date of account review is the same day, March 22, when the opening balance in the account is $7,000. The lookback period begins on March 21, the date preceding the date of account review, and ends on January 21, the corresponding date two months earlier. The account review shows that four Federal benefit payments were deposited to the account during the lookback period totaling $7,000. Two of these benefit payments, totaling $3,000, were made to the account holder against whom the garnishment order was issued. The other two payments, totaling $4,000, were made to a co-owner of the account. Since the financial institution must perform the account review based only on the presence of benefit payments, without regard to the existence of co- owners on the account or payments to multiple beneficiaries or under multiple programs, the financial institution establishes the protected amount at $7,000, equal to the sum of the four benefit payments posted to the account during the lookback period. Since $7,000 is also the balance in the account on the date of account review, there are no additional funds in the account which can be frozen.

36 Additional Resources 31 CFR Part 212 – Garnishment of Accounts Containing Federal Benefits – posted on MDJustice.org NCLC Reports, Debt Collection and Repossessions Edition, Vol. 29, Jan./Feb – available on NCLC.org Maryland Rules & – posted on MDJustice.org & available at District Court Form to claim exemptions (DC/CV 36) – available at

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