Can a Prepaid Card Be Garnished for Debt?

Prepaid cards are a common financial tool, offering a convenient way to manage funds without a traditional bank account. As their use grows, questions arise about how they fit into financial regulations, particularly concerning debt collection. Garnishment, a legal process creditors use to recover unpaid debts, is one such concern. Understanding garnishment rules, especially as they apply to prepaid cards, is important for cardholders.

Understanding Garnishment

Garnishment is a legal procedure allowing a creditor to collect an unpaid debt by seizing funds directly from a debtor’s assets or income. This process begins after a creditor obtains a court order or judgment against the debtor. The court order authorizes the creditor to pursue collection through a third party holding the debtor’s money, known as the garnishee.

Two common types of garnishment impact individuals: wage garnishment and bank account garnishment (also called a bank levy). In wage garnishment, an employer withholds a portion of an individual’s earnings and sends it directly to the creditor. For bank account garnishment, a financial institution holding the debtor’s funds receives a court order to freeze the account and release money to the creditor. Debtors often discover their bank account is frozen when attempting to access funds, as advance notice may not be given.

Prepaid Cards and Garnishment Legality

The ability to garnish funds on a prepaid card largely depends on how the card is structured and its legal classification. Many general-purpose reloadable prepaid cards are issued by banks and are associated with a bank account, even if it’s not a traditional checking or savings account. When a prepaid card is linked to an FDIC-insured financial institution and functions similarly to a demand deposit account, the funds held on that card can be subject to garnishment, much like a standard bank account. This means if a creditor obtains a valid court judgment and identifies the issuing bank, they could serve a garnishment order.

However, garnishing prepaid cards presents unique challenges for creditors. Unlike traditional bank accounts, prepaid cards often do not appear on credit reports, making it difficult for collectors to discover their existence. The sheer number of prepaid card providers also makes it harder for creditors to identify which institution might hold a debtor’s funds. While non-reloadable gift cards are generally not subject to garnishment, general-purpose reloadable cards can be, especially if linked to a Social Security number.

Exemptions for Protected Funds

Certain types of funds are legally protected from garnishment, regardless of where they are held, including on a prepaid card or in a bank account. These protections ensure individuals can maintain basic living expenses. Protected funds include federal benefits such as Social Security, Supplemental Security Income (SSI), Veterans benefits, federal student aid, and Railroad Retirement benefits. These funds are protected when directly deposited into an account.

Financial institutions must review accounts for these protected federal benefits when a garnishment order is received. They must identify and protect up to two months’ worth of directly deposited federal benefits, ensuring the account holder retains access. This “look-back” period helps trace the funds’ source. Exceptions exist where even protected funds might be garnished, such as for delinquent federal taxes, federal student loans, or child and spousal support obligations.

Steps if Your Prepaid Card is Garnished

If your prepaid card funds are garnished, prompt action is advisable to understand the situation and explore your options. Your first step should be to contact the prepaid card issuer to confirm the garnishment and ascertain the specific amount frozen. Request a copy of the garnishment order the issuer received, as this document will typically identify the creditor and the court that issued the order. This information is necessary to understand the basis of the debt and the legal proceedings.

If you believe the garnished funds include protected sources, such as federal benefits, you may need to file a claim of exemption with the court. This claim formally requests the release of the protected funds and usually requires providing documentation to prove the source of the money. Seeking legal advice from an attorney specializing in debt collection or consumer law can be beneficial, especially for navigating complex legal procedures or challenging the garnishment. An attorney can help you understand your rights and the specific exemptions applicable in your jurisdiction, as well as guide you through the process of filing the necessary paperwork.