A new interim federal rule, 31 C.F.R. Part 212 promulgated by the U. S. Treasury Fiscal Service [FN1] goes into effect May 1, 2011 protecting federal benefits automatically deposited into bank accounts from restraint or execution by judgment creditors. The interim rule applies to all banks and credit unions chartered by any state or by the federal government.
The amount protected in the account from restraint or execution is the total amount of all exempt benefits deposited in the previous two months, or the balance in the account as of the day the restraint is received, whichever is less. So, if $3,000 in social security funds were deposited in the previous two months, then the bank balance, up to $3,000, is exempt from restraint. This is more generous (from the perspective of the debtor) than New York's LIBR (lowest intermediate balance rule) of accounting.
The new interim rule applies only to Social Security, SSI, Veterans, Railroad Retirement and Federal Government employees retirement benefits. Other exempt federal benefits may be added later, by rulemaking. This interim rule does not apply if the garnishment is for child support or by the United States Government.
Here is one feature that could be very significant for New York debtors: funds deposited afterwards cannot be frozen or seized, so that the bank does not have to continually monitor the account for subsequently deposited exempt benefits (212.6(f)). So even if an account contains no protected funds, the restraint or execution only applies to the money in the account on the date of receipt. No more worrying about the paycheck or the tax refund check that is automatically deposited into a restrained account a week later.
Process: Before processing a restraint or garnishment, the bank must review every account associated with the person named in the restraining or execution order. The review must take place within two days, and the restraint or execution does not go into effect until after the review is accomplished. In other words, in the short time period between receipt of the restraint and the bank review, the bank is not liable to the creditor for any funds that are withdrawn. The bank review does not consider non-exempt funds commingled in the account, nor does it consider whether the account is in more than one name.
How does a bank know the amount of protected benefits deposited in the previous two months? Well, they shouldn't have to examine every deposit by hand. Starting around March 12 of this year, the Treasury Department began embedding batch deposits of benefits with a "batch header record" to identify these funds as exempt when they are processed by the Automatic Clearing House. I assume that will allow a bank to run a computer analysis of a bank account to determine if any exempt funds were deposited in the prior two months, and, if so, how much.
If none of these protected benefits were deposited within the lookback period, the restraint or execution would then be processed under New York's law, including our exemption statutes.
If there is money in the account, and there were deposits of protected funds within the lookback period, the bank, in addition to shielding the exempt funds from restraint or execution, will also send a notice to the account holder summarizing everything that has gone on. New York also has a notice banks are suppose to send to customers, and the federal interim rule authorizes banks to combine the state and federal notice, so as to avoid confusing the account holder (well, avoid confusing them even more, perhaps.)
The calculation by the bank of the amount being protected cannot be challenged. However, the rule does not limit any state law exemptions that are broader than this federal interim rule, nor does it limit any claim of exemption under federal law for benefits not specifically protected by this rule.
The bank may not assert an service fee for processing the restraint or garnishment against protected funds. If the whole account is protected, no fee can be asserted. The right of banks and credit unions to set off their own debts against member accounts is not addressed in the interim rule.
The Treasury Department has issued a fairly clear guideline for banks describing the new rule. For those interested in more background information, see the Federal Register 76 FR 7797, announcing the finalized interim rule February 23, 2011, and 75 FR 2029 where the proposed rule was first announced. My appreciation to the BankruptcyProfBlog, which brought this to my attention by pointing to a March 10, 2010 editorial in the New York Times.
[FN1] For the record, this is a rule jointly promulgated by Department of the Treasury, Fiscal Service (Treasury); Social Security Administration (SSA); Department of Veterans Affairs (VA); Railroad Retirement Board (RRB); and the Office of Personnel Management (OPM).