Can Funds on a Prepaid Card Be Garnished?

Funds held on prepaid cards can be subject to garnishment, a legal process allowing creditors or government entities to seize money to satisfy a debt. The vulnerability of these funds depends on the card type, how funds are held, and the source of the money loaded onto the card.

Understanding Garnishment

Garnishment is a legal procedure allowing a creditor to collect a debt by seizing a portion of a debtor’s wages, bank accounts, or other assets. Typically, a court order, or writ of garnishment, is required after a creditor obtains a judgment. However, government agencies like the Internal Revenue Service (IRS) or state child support offices may initiate garnishment without a prior court order through administrative writs or levies.

Wage garnishment involves an employer withholding a portion of an employee’s disposable earnings and remitting it directly to the creditor or designated agency. Federal law limits the amount of disposable earnings that can be garnished to the lesser of 25% of disposable earnings or the amount by which disposable earnings exceed 30 times the federal minimum wage. For debts like child support or alimony, up to 50% to 60% of disposable earnings can be garnished, with an additional 5% for payments more than 12 weeks in arrears.

Bank account garnishment, also known as a bank levy, allows a creditor to seize funds directly from a debtor’s bank account. Unlike wage garnishment, which has federal limits, a bank levy can seize all non-exempt funds in an account. Once a bank receives a garnishment order, it typically freezes the account and turns over the specified funds to the creditor.

Prepaid Card Characteristics

Prepaid cards are payment instruments loaded with funds in advance, functioning similarly to debit cards but without direct linkage to a traditional bank checking account. These cards are broadly categorized into open-loop and closed-loop systems, differing in their acceptance and underlying financial structures.

Open-loop cards, branded by major payment networks like Visa, Mastercard, American Express, or Discover, are widely accepted at various merchants and can often be used for ATM withdrawals. Funds on these cards are typically held by the card issuer in either a dedicated account for the cardholder or as part of a pooled master account where individual cardholder balances are tracked. Examples include general-purpose reloadable cards, payroll cards, and government benefit cards.

Closed-loop cards are issued by a specific merchant or a small group of merchants and can only be used for purchases within that limited network. Examples include retail gift cards or store loyalty cards. These cards generally do not allow cash access and operate outside major payment networks.

Garnishment of Prepaid Card Funds

The garnishment of funds on prepaid cards is a nuanced process, as the “card” itself is not directly garnished; rather, the underlying funds or associated accounts are the targets. If an open-loop prepaid card is linked to a traditional bank account in the cardholder’s name, that bank account is subject to garnishment. Creditors can obtain a court order to levy the bank account holding these funds.

For open-loop cards where funds are held in a pooled account by the issuer, the process can be more complex. If the issuer can identify and segregate a cardholder’s funds within the master account, those funds may be subject to garnishment upon receipt of a valid legal order. A creditor’s ability to locate and garnish funds on a prepaid card often depends on whether the card is associated with the cardholder’s Social Security number and if the creditor is aware of its existence.

Private creditors need a court judgment to pursue garnishment of prepaid card funds. However, government entities like the IRS can levy funds without a prior court order. The source of the funds loaded onto the prepaid card is a factor in determining their susceptibility to garnishment. Funds from exempt sources may retain their protected status even when loaded onto a prepaid card, if proper procedures are followed to claim exemptions.

Exemptions and Protections

Certain types of funds are legally protected from garnishment, even when deposited into a bank account or loaded onto a prepaid card. Federal law provides exemptions for various forms of income. These protected funds include Social Security benefits, Supplemental Security Income (SSI) benefits, Veterans Affairs (VA) benefits, federal student aid, railroad retirement benefits, and certain federal retirement and disability benefits.

When these federal benefits are directly deposited into a bank account or onto a prepaid card, banks are required to protect a minimum of two months’ worth of these deposits from garnishment by most creditors. This “lookback period” ensures recent benefit payments remain accessible. However, these protections are not universal; federal benefits can still be garnished for specific debts, such as delinquent federal taxes, federal student loans, child support, or alimony.

State laws may offer further exemptions for certain types of income or assets. Some states protect a portion of wages from garnishment beyond federal limits or exempt other forms of public assistance or disability payments. To claim an exemption, a cardholder needs to demonstrate that the funds originate from a protected source, often by filing a claim of exemption with the court that issued the garnishment order. Maintaining clear records of deposits is important when seeking to protect exempt funds.