Direct Deposit Requirement may Create Problems for Debt Laden Social Security Beneficiaries

By Jonathan Ginsberg, Atlanta Bankruptcy Attorney

Social Security’s new rules requiring all beneficiaries to set up direct deposit could create significant problems for beneficiaries who owe money to creditors. Protected Social Security funds that are co-mingled with other monies will likely lose their protected status and could be seized by creditors.

Federal law provides that Social Security payments are exempt from garnishment from civil creditors. If, for example, a credit card lender sues you and obtains a judgment, that creditor cannot ask Social Security to withhold funds from your government check. The only exceptions to this rules involve:

  • tax debts owed to the IRS
  • child support debt
  • all claims (including tax and child support) against SSI money. SSI is considered a welfare payment and not subject to seizure by anyone.

Social Security money that is co-mingled with non-Social Security money, however, may lose this special protection.

Social Security recipients can protect themselves by asking their bank to create a sub-account that holds only SSA issued funds. No money other than SSA funds should ever be deposited into this account. This is especially necessary if the recipient has civil judgment creditors looking for a source of funds to levy against.

In my practice, I have represented a number of senior citizen clients who are living with tens of thousands of dollars in credit card debt, have no assets or equity in property, and who survive on Social Security only. In these cases I often discourage bankruptcy and instead write each creditor advising the creditor that my client is judgment proof with no source of funds that can be garnished.

At the same time I write the credit card company, I also draft a letter to my client’s bank, putting the bank on notice that it should not honor any garnishment because the sole source of funds is Social Security money.

Often, however, I find that my clients are using their “Social Security” account as a regular bank account and they deposit other money, such as funds generated from a garage sale or a gift from a relative. I spend a lot of time explaining to my client that even a few dollars of co-mingled money may jeopardize the protected status of their Social Security bank account.

Now that many more Social Security recipients are entering the electronic banking world, I expect that more than a few will find themselves trying to get money back from a judgment creditor who found a co-mingled account.

Sometimes, senior citizens choose to file bankruptcy for the peace of mind benefit, but often a Chapter 7 or Chapter 13 filing is not necessary – instead many creditors and collection agencies will write off your debt and close their files if you can show that you are judgment proof.   If you are receiving Social Security money, I urge you to take time now – before a judgment creditor begins collection efforts – to protect your bank accounts.


jginsbergJonathan Ginsberg has represented individuals in Chapter 7 and Chapter 13 cases filed in Atlanta, Gainesville, Newnan and Rome (the Northern District of Georgia) for over 20 years. Consumer bankruptcy has become a document intensive, number-crunching process and Jonathan encourages all potential clients to educate themselves about the laws and the process of filing bankruptcy. Bankruptcy is and should always be considered as a last resort, but sometimes there is no other choice.

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