Can Creditors Take Your Stimulus Check From Your Bank Account?

Economic Impact Payments, known as stimulus checks, were direct payments from the U.S. Treasury Department to provide financial relief during the COVID-19 pandemic. These payments aimed to help households cover essential expenses during a period of widespread economic disruption. A key concern for many recipients was whether these funds were protected from creditors and debt collectors. The level of protection varied depending on the specific stimulus payment round and the type of debt involved.

Federal Protections for Economic Impact Payments

The federal government provided different levels of protection for Economic Impact Payments (EIPs) across the various disbursement rounds. The first round, authorized by the CARES Act, protected payments from certain federal and state government debt offsets. However, it did not explicitly shield them from garnishment by private creditors or banks for outstanding judgments or overdrafts. This initial lack of comprehensive protection led to concerns that private debt collectors could seize these funds once deposited into bank accounts.

The second round of EIPs, authorized by the Consolidated Appropriations Act, included stronger federal protections. This legislation explicitly stated that these new payments could not be reduced to offset federal debts or state child support enforcement orders, and they were protected from garnishment by debt collectors. Banks received specific coding to automatically shield these funds from garnishment.

The third round of EIPs, authorized by the American Rescue Plan Act, had different protections. While protected from outstanding tax debt and child support, these payments did not carry the same federal protections against garnishment by private creditors as the second round. Private creditors could potentially garnish these funds with a court order, posing a risk to recipients.

State Law and Bank Account Garnishment

Bank account garnishment is a legal process allowing a creditor, after obtaining a court judgment, to seize funds directly from a debtor’s bank account. This process typically begins with a creditor filing a lawsuit and securing a judgment, followed by a writ of garnishment served on the bank. Upon receiving such an order, the bank freezes the debtor’s account up to the garnishment amount. Unlike wage garnishment, a bank levy can take all non-exempt funds.

While federal law offered specific protections for some stimulus payments, state laws also play a significant role in bank account garnishment. States have their own exemption laws that protect certain types of income or assets from creditors. These exemptions often include benefits like Social Security, veteran’s benefits, and public assistance. During the pandemic, some states specifically protected stimulus payments from garnishment through legislation, executive orders, or guidance.

These state-level protections varied, with some states advising financial institutions that EIPs were considered public assistance and thus exempt, while others issued specific prohibitions against garnishment. This meant state actions could offer an additional layer of security even when federal law did not provide comprehensive protection. However, without specific state action, private creditors with a valid court order could still pursue garnishment of stimulus funds.

Exceptions to Payment Protection

Despite various protections, some debts and creditors were not always subject to the same limitations regarding stimulus payment garnishment. Past-due child support was a notable exception. For the first round of stimulus checks under the CARES Act, these payments could be intercepted by state and federal agencies to cover overdue child support obligations. However, this rule changed for the second and third stimulus payments, which were specifically protected from garnishment for child support.

Stimulus payments could also be vulnerable to debts owed to the federal government, especially for federal taxes. Although direct stimulus payments generally could not be seized for back taxes, if a recipient claimed missing stimulus money as a Recovery Rebate Credit on their tax return, the Internal Revenue Service (IRS) could garnish that portion for outstanding tax debts. This meant that the method of receiving the stimulus payment could influence its susceptibility to government offset.

Additionally, some financial institutions might have used direct-deposited stimulus funds to cover overdraft fees or other debts owed directly to the bank. This practice, known as the right of setoff, could occur even if the funds were otherwise protected from third-party garnishment. While some banks voluntarily pledged not to do this, it remained a potential vulnerability for account holders. Private creditors with a civil judgment against an individual could pursue garnishment of the third stimulus payment, as it lacked federal protection from these private debts.

Identifying Seized Funds and Seeking Recovery

If you suspect your Economic Impact Payment has been improperly seized from your bank account, understanding the procedural steps to address this situation is important. First, confirm the funds were indeed stimulus payments and that a garnishment has occurred. Banks typically freeze accounts upon receiving a garnishment order, which prevents the account holder from accessing the funds. The bank should also notify the account holder of the garnishment.

Upon notification, contact your bank to understand the garnishment specifics, including the creditor’s name and the amount seized. If the seized funds are identifiable as protected stimulus payments, you may have grounds to challenge the garnishment. This challenge usually involves filing a claim of exemption with the court that issued the garnishment order. These claims assert that the funds are protected by federal or state law and should be returned.

Timeliness is important when filing an exemption claim, as many states have strict deadlines, often within 10 to 30 days of receiving the garnishment notice. The process generally requires submitting specific paperwork to the court clerk’s office and may involve a court hearing where a judge determines the validity of the exemption claim. Seeking legal assistance from a consumer law attorney or legal aid organization can significantly improve your chances of successfully recovering improperly garnished funds, as they can provide guidance on specific state laws and court procedures.