New Federal Protection for Exempt Bank Funds
A new federal rule that was effective on May 1, 2011, will increase protection for exempt funds in a garnished bank account. Federal law already protects many federal benefits, but it is currently the responsibility of the individual to claim these funds as exempt. Often the bank will freeze a bank account pursuant to an order and the individual must request a court hearing to release the funds.
Under this new Treasury Department rule, an electronic tag will be added to automatic deposits from government agencies. These funds include Social Security, Supplemental Security Income (“SSI”), Veteran’s Administration (“VA”) benefits, federal Railroad Retirement, federal Railroad Unemployment and Sickness benefits, federal Civil Service Retirement benefits and federal Employee Retirement System benefits. Banks are required to exempt all tagged deposits made during the previous two months and protect those deposits from garnishment. The consumer is no longer required to take any action to claim or identify exempt funds. The rule makes banks not liable to creditors for refusing to garnish the tagged funds, even if the money is co-mingled with other non-exempt money.
The National Consumer Law Center estimates that more than 1 million people each year have accounts garnished that contain exempt federal funds. Recipients are often sick or elderly and may be forced to forego needed food and medicine when an account is frozen.
This new rule applies to all federally chartered federal and state banks and credit unions. While there is no cap on the amount of protected funds, the automatic protection only applies to the previous two months. Exempt funds must be deposited electronically to receive the identifying tag. Deposits made by paper checks are still exempt, but the bank is under no obligation to identify these funds or protect them from garnishment. The rule does not apply to military retirement or state issued benefits.
There are many powerful consumer protection laws. If you have a judgment against you and are at risk of a bank or wage garnishment, consult with an experienced bankruptcy attorney and discover how the law can help. Your attorney can discuss your legal options to make the best of a bad situation.
Bank Overdrafts Can Make Financial Trouble Worse
Every day is a new opportunity to make good financial decisions. If your income has been significantly reduced, one decision that may help is to ensure that your bank does not charge you overdraft fees on your debit card purchases.
A new federal banking regulation that took effect July 1, 2010 requires banks to obtain a customer’s consent before charging overdraft fees for debit card purchases whenever there are not sufficient funds to cover those purchases. Consumers who do not “opt-in” may have their debit cards declined at the cash register.
When an individual suddenly has a reduction of income, it is often difficult to keep track of monthly finances. This could result in bank overdrafts. A $5.00 burger and soda could wind up costing $35 or $40 after bank fees are assessed. In some cases overdraft fees can quickly multiply to hundreds of dollars. Additionally, some banks charge negative balance fees that may be assessed on a daily basis. A prolonged negative balance could result in closure of the account and a consumer report to Chex Systems, making it more difficult to open another bank account.
Bank fees are avoidable debts that can only complicate a bankruptcy case. Many debtors in bankruptcy want to maintain a good relationship with their local bank, and consequently will pay the bank debt. In cases where the debt is not paid, a new bank may not agree to open a new account for you until the debt to your former bank is paid – regardless of whether that debt was discharged in bankruptcy.
When money is extremely tight, consider using cash to pay for ordinary purchases like lunch, groceries, or gas. Cash may be less convenient than using your debit card, but it is easier to keep track of your money and see how it is being spent.
If you are experiencing financial difficulties due to a sudden reduction of income, consider opting out of overdraft fees from your bank. A small inconvenience at the cash register could save you from a considerable headache later. Your bankruptcy attorney can advise you on additional ways to avoid further difficulties by making to adjustments to your finances. Consult with an experienced bankruptcy attorney and learn how the federal bankruptcy laws can help you.
Can I Have Money in a Bank Account When I File Bankruptcy?
The two most common types of consumer bankruptcies are Chapter 7 and Chapter 13. In a Chapter 7 all of the debtor’s property is placed into an estate which is controlled by the bankruptcy trustee. While no property physically changes hands (at least not at the beginning of the case), the trustee and bankruptcy court have broad legal power over your property. If you have money in a bank account on the day you file, your bank account and money are assets of the bankruptcy estate. You are no longer free to transfer funds or assets as they now belong to the bankruptcy estate.
Take for example that you have $5,000 sitting in your checking account on the day you file bankruptcy. That money is property of the Chapter 7 bankruptcy estate and is no longer yours to control or use. If you take the $5,000 out of the bank the day after filing to pay your mortgage payment and other bills, the Chapter 7 trustee can seek to recover those funds, either from you or from the payee.
During a Chapter 13 bankruptcy the debtor retains possession and control over his or her property, and is free to use any funds in the debtor’s bank account. An accounting is performed and the debtor’s property is classified as either exempt or non-exempt. Non-exempt property is not taken from the debtor (as is often the case in a Chapter 7), but the Chapter 13 debtor is required to pay unsecured creditors a sum equal to the amount of non-exempt equity. For instance, if there is $5,000 in the debtor’s bank account, the debtor may only be able to exempt a portion of the entire sum. The non-exempt portion must be paid to the creditors through the debtor’s Chapter 13 plan (over three to five years).
Cash in a bank account can be a problematic issue for a debtor. Avoiding these problems is the joint responsibility of the debtor and the debtor’s bankruptcy attorney. Timing is critical to minimizing your financial exposure. An experienced bankruptcy attorney can help you maximize the benefits of the bankruptcy laws and navigate around any pitfalls.