Federal Benefits and Bank Garnishments

The first thing to do when a garnishment order is received is to check whether the order is valid and also whether the debtor has an account or other property with the institution. The kind of legal procedure involved makes a difference. Thus, a private creditor's garnishment is not always handled the same way as a child support order, a government garnishment, or a tax levy. When it comes to certain garnishment orders, banks are also required to take into account the federal benefit protections set out in 31 CFR Part 212. At this point, the account review becomes particularly important.

If the federal benefit rules are in effect, the bank usually reviews the account history over a 2-month lookback period to identify payments covered by those rules. These may include payments such as:

When covered payments are identified, the bank may be required to determine a protected amount that remains available to the customer. It is an important distinction, since the existence of a garnishment order does not necessarily require the institution to immediately freeze the entire account balance.

It is natural for banks to respond promptly when a legal process is served, since missing a deadline or failing to respond properly could make the institution liable. Rushing too quickly leads to another kind of problem. In most cases, customers have to be given access to the amount of money that is protected by federal law; otherwise compliance problems could arise and the bank would be in a difficult situation with the customer. The aim goes beyond merely freezing the funds; it is to determine which funds are actually subject to garnishment and then take appropriate action. That needs to be carefully reviewed rather than following a one-size-fits-all approach.

The consideration must also include the benefits afforded by the federal government. The state law could provide protection for other funds or property, such as the minimum balance in an account, wages, retirement funds, public assistance, insurance payouts, or other assets.

Account ownership can also make the situation more complicated. Whether the account is individual, joint, held in trust, fiduciary capacity, in the name of a business, custodial, or of another type may call for a different kind of analysis. A bank must not simply assume how much of a joint account belongs to the judgment debtor without taking into account the relevant law.

One reason why garnishment procedures should have clearly defined escalation points is that in some cases the situation is simple while in others extra review is needed before any funds are frozen or released.

Garnishments usually involve multiple departments within the bank: frontline staff may be asked questions by customers, the deposit operations team may examine accounts, the compliance department may need to interpret requirements, and, in more complicated cases, legal advice may be needed.

A well-defined process makes it easy for everyone to understand their role. The procedures need to specify the process for reviewing orders, determine when account reviews are necessary, explain how protected amounts are to be identified, state when notices are required, and indicate which situations should be escalated. Staff should also appreciate an important rule: when a legal procedure is received, the bank need not release the funds simply because a creditor asks for them.

Banks have to balance their different responsibilities, as garnishments require compliance with valid legal process while also taking into account the federal and state protections that may apply to the customer's funds. Federal benefits payments are a perfect example of the importance of that balance.

Having a consistent review process will enable the bank to avoid over-freezing, safeguard funds that should remain available, meet required response deadlines, and reduce the risk of inconsistent decisions across accounts and branches.

Federal benefit protection is only one part of handling the legal process correctly. The full webinar, Handling Garnishments, Levies & Subpoenas: A Legal & Compliance Toolkit, explores additional situations financial institutions may encounter and the steps staff should consider when responding. The training covers topics including: