Can Credit Card Companies Take Your Stimulus Check?

Stimulus checks provided financial support during challenging economic periods. A common concern was whether these payments were vulnerable to debt collection efforts, particularly from credit card companies. Understanding the specific protections for these funds became important for many recipients.

Federal Protections for Stimulus Payments

The level of protection for Economic Impact Payments (EIPs) from private creditors, including credit card companies, varied significantly by the specific legislation under which they were issued. The first round of stimulus payments, authorized by the CARES Act in March 2020, did not include federal protections against garnishment by private creditors or debt collectors. If these funds were deposited into a bank account, a creditor with a valid judgment could potentially seize them. Recipients were often advised to promptly withdraw these funds to cover essential expenses.

Later legislation provided stronger safeguards for subsequent payments. The Consolidated Appropriations Act of 2021, enacted in December 2020, explicitly protected the second round of stimulus payments from garnishment by private creditors, child support, and federal debts. These payments were specifically coded in a way that banks could recognize and automatically protect them from garnishment orders.

However, protections changed for the third round of payments. The American Rescue Plan Act of 2021 (ARPA), passed in March 2021, did not include federal protection from private creditor garnishment. While ARPA payments were protected from garnishment by the IRS and other government agencies, private creditors were not federally restricted from pursuing these funds if a judgment was in place. Some states issued their own directives to protect these third-round payments, so protection depended on the recipient’s state of residence.

General Rules for Bank Account Garnishment

Bank account garnishment, also known as a bank levy, is a legal process where a creditor can seize funds directly from a debtor’s bank account to satisfy a debt. When a financial institution receives a garnishment order, it must determine if the account contains funds exempt from seizure under federal law. Banks generally follow specific procedures to protect certain federal benefits directly deposited into a consumer’s account. These protected benefits include Social Security, Supplemental Security Income (SSI), Veterans benefits, and Railroad Retirement benefits.

Federal regulations mandate that banks review accounts for a “lookback period” of two months preceding the garnishment order. During this review, the bank identifies any direct deposits of protected federal benefits. The bank must then ensure the account holder has access to an amount equal to the sum of these protected benefit payments, or the current balance if lower. The bank may not freeze this protected amount.

If the account review shows no federal benefit payments during the lookback period, or if the funds exceed the protected amount, the bank typically follows its standard procedures for handling garnishment orders for the unprotected portion. This regulatory framework helps ensure individuals receiving federal benefits retain access to those funds, even when facing debt collection actions. The bank is generally required to notify the account holder that a garnishment order has been received.

Creditor Collection Powers and Limitations

For credit card companies to access funds in a bank account, they must first obtain a court judgment against the debtor. Credit card debt is unsecured, meaning it is not backed by collateral. Without a judgment, a credit card company cannot directly withdraw money from a bank account or seize assets. Their collection efforts without a judgment are limited to sending collection letters, making phone calls, and reporting the debt to credit bureaus.

To secure a judgment, a credit card company must file a lawsuit in civil court. The debtor must be formally notified of this lawsuit through “service.” If the individual fails to respond within the specified timeframe, the court may issue a default judgment for the creditor. If the case proceeds, the credit card company must present sufficient evidence, such as the original credit agreement and account statements, to prove the debt is owed.

Once a judgment is obtained, the credit card company gains tools for debt collection. These can include wage garnishment, placing liens on property, or initiating a bank account levy. However, even with a court judgment, certain funds, such as federally protected benefits, remain exempt from seizure. The legal process for obtaining and enforcing a judgment involves specific procedural requirements that creditors must follow.