When a customer overdraws their account by spending more than their balance, can their social security deposits be used to set-off the negative balance and pay any overdraft fees? Is there any difference if the overdraft is due to fraud, such as a romance or loan scam?

We believe that you may exercise a valid right of setoff to cover overdrafts and pay overdraft fees using funds in a customer’s account that consist of social security benefits — provided that your deposit account agreement allows for a contractual right of setoff.

The Social Security Act prohibits social security benefit payments from being “subject to execution, levy, attachment, garnishment, or other legal process.” However, federal courts have held that a bank does not violate this prohibition by setting off account overdrafts and overdraft fees against deposited social security benefits when a contractual right of setoff is provided for in the deposit account agreement. However, an account containing social security payments should not be used to set-off a debt other than an overdraft, such as a delinquent loan payment.

If the customer incurs an overdraft due to a romance or loan scam, we do not believe that this answer would change — you would still be permitted to exercise a valid right of setoff as provided in your deposit agreement.

For resources related to our guidance, please see:

Symanski v. First Nat. Bank of Danville, 242 Ill.App.3d 391, 396–397 (4th Dist. 1993) (“There are two bases on which defendant could assert a right of setoff . . . . Under common law, a bank has the power to apply the deposit to the payment of such depositor’s indebtedness only when there are mutual demands and debts between the parties, and this right of setoff arises at the time the depositor’s indebtedness to the bank has matured. . . . As evidenced by our previous discussion, parties can contractually agree to a right to set off.”)

Social Security Act, 42 USC 407 (“The right of any person to any future payment under this title shall not be transferrable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process or to the operation of any bankruptcy or insolvency law.”)

Wilson v. Harris N.A., 2007 WL 2608521 (N.D. Ill. 2007) (“Notably, other courts have concluded that § 407 [of the Social Security Act] does not prohibit a bank from using Social Security funds to pay overdraft fees pursuant to a voluntarily-entered account agreement.”)

Wilson v. Harris N.A., 2007 WL 2608521 (N.D. Ill. 2007) (“In Lopez, the court concluded that the defendant’s practice of using the plaintiffs’ direct Social Security deposits to pay account overdrafts and overdraft fees did not violate § 407(a). This court adopts that conclusion, as well.”)

Lopez v. Washington Mutual Bank, 302 F.3d 900, 904 (9th Cir. 2002) (“Although Nelson was actually construing 38 U.S.C. § 5301(a), which protects veterans’ benefits from creditors, we expressly noted the similarity to Section 407(a) and relied upon Social Security cases to reach the result. . . . However . . . we agree with the district court that no violation of Section 407(a) occurred in this case because there is simply no indication that the plaintiffs did not voluntarily agree to apply their SSI benefits in such a fashion.”)