Preserving Social Security Benefits Against Creditor Claims

Debt is common for most Americans. Unexpected events such as job loss or sickness may cause defaults on debt.  The resulting credit damage or creditor judgments may follow a debtor for life. To that end, many Americans nearing retirement or in retirement who rely on social security benefits wonder if social security benefits are subject to creditor claims. The short answer, in most cases, is no.

The United States Code explicitly protects social security benefits from any attachment, garnishment, or other legal process utilized by creditors seeking debt repayment. 42 U.S.C. § 407(a). However, social security benefits can be garnished to pay for federal tax debts, delinquent child support or alimony, and federal student loan debts. Generally, a creditor will file a lawsuit against a debtor after unsuccessfully trying to collect the debt. If the lawsuit is successful, a court will enter a judgment against the debtor and the creditor may obtain a court order that permits the creditor to garnish funds from a debtor’s personal bank accounts.

In order to protect federal benefits, the United States Department of Treasury promulgated regulations prohibiting garnishment of federal benefits, including social security payments and Veteran Affairs benefits, which are deposited into a beneficiary’s bank account via direct deposit. 31 C.F.R. § 212.1. The Treasury regulations effectively instruct banks to protect social security benefits from creditor collection efforts.

Social security beneficiaries can encounter issues when benefits are deposited into personal accounts via paper check. Banks are not required to protect paper check deposits. If benefits deposited by paper check have been frozen, the beneficiary must proceed to court and prove that the frozen funds are federally protected benefits. Creditors may not threaten to garnish social security benefits. If a creditor expresses intention to seize social security benefits, the creditor may be in violation of the Fair Debt Collections Act, which is a federal law regulating debt collection practices.

If you believe your benefits have been wrongfully seized or frozen, you should seek legal counsel immediately. Proper tax, estate and asset protection planning often provides retirees and those nearing retirement a general sense of security and solace. To establish an estate plan and ensure you are assets are best accounted for, please do not hesitate to contact our offices.

Michael Salad is a partner in Cooper Levenson’s tax practice group. He concentrates his practice on estate planning, probate, business transactions, mergers and acquisitions, tax matters and cyber risk management. Michael holds an LL.M. in Estate Planning and Elder Law. Michael is licensed to practice law in New Jersey, Florida, New York, Pennsylvania, Maryland and the District of Columbia.  Michael may be reached at 609.572.7616; 954.889.1850 or via e-mail at msalad@cooperlevenson.com.

Craig Panholzer is an associate in Cooper Levenson’s tax practice group. He concentrates his practice on estate planning, probate, business transactions and tax matters. Craig may be reached at 954.889.1856 or via e-mail at cpanholzer@cooperlevenson.com.

Trevor Waldron is a summer associate in Cooper Levenson’s Atlantic City, New Jersey office.

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