The Social Security Act prohibits the transfer or assignment of Social Security payments, and this prohibition applies to offsetting debts with Social Security payments. Consequently, a bank cannot offset a deposit account that contains only Social Security payments, with a narrow exception for overdraft and similar account fees. For example, a federal bankruptcy court in Illinois has held that a credit union could not use Social Security deposits to offset a customer’s car loan and credit card debt.
For a deposit account with commingled funds (involving both Social Security payments and other types of deposits), you may apply the non-Social Security funds in the account to offset a debt to the bank (provided that the right of setoff is valid, as explained in this IBA Q&A). Before exercising this right of setoff, you should identify any payments that are Social Security payments and document that those payments are not being applied to the customer’s debt by the setoff. The Department of the Treasury has provided instructions for identifying Social Security payments in a commingled account, as follows:
Treasury will encode “XX” in positions 54-55 of the Company Entry Description Field and “2” in the Originator Status Code Field of the Batch Header Record of the direct deposit entry.
The garnishment exemption identifiers encoded in the Company Entry Description Field can be used to identify exempt federal benefit payments both in an automated processing environment and in an environment in which the financial institution relies on a visual search.
In the instance of a visual search, the financial institution will rely on the exemption identifiers printed on the account statement.
For resources related to our guidance, please see:
- 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, *9 (N.D. Ill. 2007) (A bank does not violate the Social Security Act “by collecting an overdraft fee from funds on deposit, whenever those funds originated from a monthly Social Security payment. . . . 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.”)
- In re Brewer, 2002 WL 32917680, *3–4 (Bankr.S.D. Ill. 2002) (“For that reason, this Court finds that . . . a Credit Union could not use the self-help remedy of set-off and apply Social Security benefits contained in a checking account to satisfy a depositor’s loan obligation is the correct decision in the instant case. . . . In the case presently before the Court, there is no dispute that the funds which the Credit Union seeks to offset against prepetition debt of the Debtors are directly traceable to the Social Security benefits of the Debtors. This being the case, the Court concludes that 42 U.S.C. § 407(a) prohibits the action contemplated by the Credit Union regardless of the prior agreement of the Debtors that the subject funds would act as collateral for their loans from the Credit Union.”)
- FRB Philadelphia, Compliance Corner, Compliance Alert: Attachment and Right of Setoff of a Bank Account Receiving Social Security Benefits (Fourth Quarter 2007) (“. . . it appears from these cases that banks are generally prohibited from allowing levy or garnishment of customer accounts funded only by social security benefits when the garnishment is from a third-party creditor or when the debt is owed to the bank but is unrelated to the account receiving the social security benefits. One example is attempting to pay a customer's delinquent credit card debt by a setoff against the deposit account for social security benefits. But some recent cases have recognized an exception when the bank is performing an offset against a protected account because of a delinquency in the account, typically an overdraft or an overdraft fee. The lesson for banks is that they should proceed cautiously in this area and review their policies and procedures to ensure that they are in compliance with state and federal law.”)
- Department of Treasury FAQ on Garnishment of Accounts Containing Federal Benefit Payments (“How can a financial institution identify a federal benefit payment?”)