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Life of a Law Student, University of Houston Law Center

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Debt Collectors, Banks Going after Seniors’ Social Security Payments in spite of Federal Prohibition

By: Luke Gilman | Other Posts by
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Not the finest hour for banks in a pair of WSJ articles from Ellen Schultz.

Heart surgery halted Viola Sue Kell’s work sewing carpets in a rug mill in 2001. It was the end of 40 years of cleaning motel rooms, restaurant jobs, “just hard stuff,” says Mrs. Kell, a 64-year-old widow. She applied for Social Security disability, and her monthly $827 benefit now is her only income.

But when Mrs. Kell tried to pay her mortgage and electric bills in 2004, her checks bounced. Every cent of the Social Security check, which went straight to her bank each month, had been taken by a debt collector that had garnished her bank account.

Federal law says creditors can’t take Social Security and Veteran’s benefits to pay debts. Yet the practice is widespread. There is no established process for enforcing the federal prohibition.

The garnishment process can be rewarding for banks. When they restrain an account, they collect a range of fees — for imposing the freeze, for the resulting bounced checks, or for short-term loans to prevent bounced checks. If the account contains Social Security, banks commonly collect these fees and their loan repayment out of those exempt funds. Banks argue that the ban on collecting debts out of Social Security benefits doesn’t apply to them.

From the WSJ: The Debt Collector vs. The Widow ($)

James Cain, a terminally ill Florida veteran, got his first Social Security disability payment last month. Before he could withdraw any of it to pay for his medicine or mortgage, his bank took it out of his account. His wife’s Social Security check went in the same day. The bank took most of that, too. It withdrew the money to make payments to itself on a car loan the bank had made to the Cains.

Federal law says Social Security can’t be taken to repay debts. So how can banks do it? They don’t use the technique of debt collectors, which is to file garnishment orders on bank accounts — orders that succeed because by and large no one is enforcing the exemption. Banks have a different rationale. They say the federal ban on taking Social Security benefits to repay debts doesn’t apply to them. The reason: They aren’t really collecting debts.

They cite the doctrine of “set-off,” which says banks can collect money that customers owe them by taking it out of customers’ accounts. All agree this traditional practice makes sense for routine fees like monthly account charges. But banks apply it broadly, to other money customers owe them. Banks argue that when they take cash out of a customer’s account — including cash from a Social Security check — they aren’t really collecting a debt, just “setting off” what’s owed them.

From the WSJ: Banks Tap Social Security Funds Too ($)

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