Consumer Law Blog Essay

Time is Running Out to Protect Americans’ Relief Payments from Debt Collectors

A critical piece of Congress’ coronavirus relief bill, the CARES Act, provides for direct payments to American households. Most individuals are scheduled to receive up to $1,200, married couples up to $2,400, plus an additional $500 per child. Right now, the U.S. Treasury is gearing up to start direct depositing funds into Americans’ bank accounts, with paper checks or other forms of payment to follow in the coming weeks or months. Treasury will use information from filers’ 2018 or 2019 tax return or their most recent social security statement to determine where to send the money.

When American families finally receive their relief payments, they may lose them before they can use the money to pay for food, utilities, and other necessities. This is because Congress failed to address an important issue: debt collection through garnishment. Garnishment is the process whereby a creditor delivers a court order to someone who owes a debtor money—like an employer who owes an employee wages or a bank that holds a person’s checking or savings account. Instead of that employer or bank paying the employee or account holder, they pay the creditor with the garnishment. This creditor may be a payday lender, a credit card company, or a medical provider. 

Every year, millions of Americans have money removed from their paychecks to pay past-due consumer debts. These garnishments have continued through the coronavirus pandemic. The pandemic did not stop even the federal government from collecting debts through garnishment. Education Secretary Betsy DeVos only recently ordered the Department of Education to halt garnishments on defaulted student loans, but not before it had taken people’s tax refunds to pay student loan debt. And, perhaps most concerning right now, when a creditor sues to garnish money from someone’s bank account, that account often is immediately frozen, preventing the holder from accessing any money.

Here’s the problem: nothing in the CARES Act directly protects the relief payments from being garnished by private debt collectors. Imagine you get a life-line when you desperately need to make car payments, keep up with insurance premiums, buy groceries, and cover medical expenses, only to find out that the money has disappeared from your bank account before you even saw one cent of it.

We think this was an oversight. The law provides that the stimulus funds cannot be offset on account of certain other debts that the individual already owes to states or the federal government, such as federal student loans. The relief payments are emergency funding meant to help Americans survive through a period where millions are losing their jobs and watching their savings (if they had any) dwindle. Some estimate the unemployment number could climb to an astounding 40% by next quarter. While the CARES Act fails to specifically address the garnishment issue, we do not think Congress intended this.

The solution to this problem is simple. The CARES Act gives Treasury Secretary Steven Mnuchin the power to issue rules necessary to carry out the law’s purpose. The Treasury only has to code the payments in the same way it codes social security and similar government benefit payments when it sends them to financial institutions (with a “XX” code that denotes a “federal benefit payment exempt from garnishment”). Banks are required to protect from garnishment at least two months’ worth of such coded funds in a person’s bank account. Giving a similar “XX” coding here will ensure that relief payments are given the same protection as other federal benefits—nothing more and nothing less.

Time is of the essence. Treasury will begin processing payments in the next week, payments that debt collectors may swoop in to take away from Americans. This is not the time for debt collection. It can wait. This is the time to ensure families have the money they need to keep the lights on, keep food on the table, and pay rent. Reports already indicate significant delays in filing and approval for unemployment insurance. It’s also worth noting that the CARES Act eviction moratorium only applies to federal housing programs and properties on which there is a federally-related mortgage. That leaves many tenants out in the cold—nearly three-fourths of all renters. This is not only bad news for people facing eviction, but also others whose lives are put at risk by more people being unable to shelter-at-home or social distance effectively to prevent the spread of coronavirus. That means getting these relief payments into the pockets of American families is more important than ever.

Banks also have an incentive to make sure these payments are protected from being swept away by debt collectors. Banks are at the center of the distribution system for allocating federal relief to struggling families and businesses. They will take major hits to their already shaky reputations if they have to face their customers, many of whom have lost their jobs and desperately need the relief payment, and tell them why their accounts were locked and why the money disappeared.

These consequences are not inevitable. Secretary Mnuchin can use his regulatory authority to shield these vital payments from debt collectors. But to do so, he must act quickly.