Social Security Payments Caught in Illegally Frozen Bank Accounts

In an April 23rd article, New America Media editor Khalil Abdullah speaks to South Brooklyn Legal Services' SSI and
Disability Rights Director Johnson Tyler about the continuing problem of debt collectors who file claims on exempt accounts, which include Social Security and veterans' benefits.

Social Security, disability benefits, Veterans Benefits, pensions,
child support, workers compensation, and unemployment insurance are
exempt from collection by creditors and debt collectors. Until January 2009, a
loophole in the law allowed banks to freeze accounts containing
this exempt income, often with devastating consequences to individuals
and families who depended on the funds for housing, food, and other basic
living expenses. Those who had their accounts frozen carried the burden
of proving that the funds should be exempt, a complicated task that could
take weeks or even months. Meanwhile, late fees, overdraft fees, and
bounced check fees piled up, making a bad situation even worse.

Legislation signed by Governor David Paterson last fall closed this loophole in New York State; however, in 60-year old Ronald Coote's case, the Exempt Income Protection Act did not apply
because his collection agency attempted to seize his account prior to
the bill's effective date of January 1, 2009.

Bank account freezes are designed to prevent account holders from
withdrawing funds before creditors can collect on legal claims. Debt
collectors, though, often file claims on exempt accounts.

"The freeze creates a hostage-like situation where the creditor can
wait out the debtor by demanding payment,” said attorney Johnson Tyler,
director of the Social Security/Consumer Rights Unit at South Brooklyn
Legal Services.

Tyler explained that often consumers don’t know SSA funds are exempt
and agree to make payments to have the freeze lifted, so they can
access their accounts. He suggested the problem might be worse in
communities where limited proficiency in English is common.

In 2002, Coote was a mid-level manager at a Western Beef grocery store
in the Bronx, when his foot got caught in an uncovered drain at the
facility. He fell, and the injury rendered him unable to work.

In addition to two herniated disks, tests confirmed arthritis in the
lower part of his spine, a heart ailment, and other debilitating
medical conditions. Then in his early 50s, Coote began receiving
benefits in 2003. Friends and family members also helped at times.

Taking money from loved ones, well, it doesn’t make me feel good,” Coote confided.

Last year, Coote complied with the debt collector’s request for three
months of his bank statements to show that he was barely surviving
financially with SSA funds and should be considered uncollectable. But
the collection agency saw that he had deposited non-SSA money, modest
personal gifts. The collector claimed Coote’s account was no longer
exempt because it included “co-mingled funds.”

Coote contacted Tyler, who convinced the collection agency that, under
the Social Security Act, his account could not be garnished. Because
Coote had already spent the money by the time the bank had frozen the
account, the claim of co-mingled funds was not valid, Tyler told the
collection agency. He threatened to sue if the bank did not end the
freeze.

‘Debt Collection on steroids’

Because of complications with bank account freezes, varying definitions
of co-mingled accounts, or imprecise calculations of exempt funds,
consumer rights advocates contend bank freezes and garnishments on
accounts, such as Coote’s, are illegal. They argue that the freezes
violate the intent and spirit of the federal law’s mandate to provide a
floor above the poverty line for Americans.

Collection agencies use computer searches for debtors’ accounts as
easily as commercial fishing crews use huge trawling nets to haul in a
catch. Using a database and a keystroke, a collector can broadcast an
electronic inquiry on a claim to every bank in a state.

“It’s debt collection on steroids,” said Tyler. “Computers are talking to computers.”

New York is one of only a handful of states that have taken action on this issue. A lack of federal regulation has resulted in what advocates call a "patchwork" of state legislation. Many are calling for a renewed effort to pass federal legislation protecting Social Security recipients from illegal garnishment and bank freezes.

Read the New America Media article in its entirety by clicking here. 

Earlier: In a January 27th "Outside Counsel" feature in the New York Law Journal, Johnson Tyler wrote that New York's Exempt Income Protection Act can serve as a
model for the rest of the country in eliminating conflicts between
debt-collection procedures and federal and state exemption laws,
protecting benefits for disabled, elderly and impoverished people.