Rethinking the garnishment exemption process

I’m often asked whether a creditor can garnish a bank account that contains social security (or other exempt money). The answer–at least in Minnesota–is that creditors can garnish your bank account containing exempt money. They just can’t keep the exempt money if you properly claim an exemption. Unfortunately, the account can remain frozen for a couple of weeks while the exemption process plays out. Obviously, not having access to an account for a couple of weeks results in bounced checks, unpaid bills, and bank fees for most people.

Despite the flaws, creditors argue that this is the fairest approach because the creditor doesn’t know whether exempt money is in the account. Only the debtor has that information, so it makes sense to put the burden for proving the exemption on the debtor. While true, this argument completely ignores the role of the third party to the garnishment process–the bank. Many consumer advocates have long argued that banks get an unjustified free pass in this situation. And this argument makes some sense, especially in an age where most federal benefits are delivered electronically to a person’s account. Here are some of the suggestions bouncing around:

  1. Give debtors an opportunity to claim an exemption before their accounts are garnished.
  2. Require banks to review the account in question, and refuse the garnishment if all the funds in it are exempt. If the exempt money is commingled with non-exempt money, the bank should allow the garnishment to reach only the non-exempt money. Banks, of course, will argue that this places too high of an administrative burden on them. But it’s hard to take this argument at face-value when you consider that banks are making a bunch of money by charging consumers a fee each time their account is garnished.
  3. Along the same lines as the previous suggestion, force banks to create a separate account for the exempt money. This way, it will be easy for the bank to determine if the debtor is receiving exempt money and how much.
  4. Prohibit bank garnishments if the account balance is below a certain dollar amount. Creditors will obviously argue that this creates the potential for abuse by debtors, but there is some legal justification for it. For example, most states have laws that allow only a certain portion of a person’s wages to be garnished. These laws recognize that people need some money to live on. Why can’t we apply this principal to bank garnishments too?

I think the third option is probably the fairest compromise, and I often recommend that my clients take the initiative and open a separate account to put their exempt money into. This approach allows consumers to have unrestricted access to exempt money, minimizes the administrative burden on the bank, and still gets the creditor all the money they’re entitled to.

(photo: suavehouse113)