New rule protects federal benefits from bank levies

Starting May 1, 2011, banks will no longer be able to turn over some federal benefits held in their accounts to creditors. Previously, when a creditor got a bank levy against a consumer, they could take all the funds in an account, and the consumer would have to use a time-intensive process to claim a state or federal exemption to get the funds back. But in the meantime, the consumer could not access that money. The new rule issued by the U.S. Treasury Department will require banks to check, before turning funds over to a creditor, whether federal benefits (Social Security, SSI, VA benefits, etc.) were deposited into the account within the previous two months. If so, the banks will not be able to send those two months of federal benefits to the creditor. The new rule does not apply to garnishment by a child support agency.

In addition to the new protection, money not protected by the new rule may still be protected under state law. Consumers will still need to fill out the exemption notice for exempt benefits beyond the ones covered by the new rule.

One very important note--this new protection will not apply to federal benefits deposited by paper check. To get the protections, a recipient must sign up for direct deposit or a Direct Express card. Also, the protection will not apply to funds transferred to another bank account. So if you receive the money in your checking account, and transfer it to your savings account, it is no longer protected by the new rule.