If you were hoping to get a $1,400 stimulus check from the recently enacted American Rescue Plan Act of 2021, but have unpaid debts, you need to temper your expectations. Why? Because it has come to light that creditors can garnish stimulus checks to recover on unpaid debts.
Types of Debt That Can Be Repaid Via Garnishment
There are generally three types of unpaid debt that are capable of being repaid through garnishment:
- Delinquent IRS tax debt;
- Other government-imposed debt such as child support and spousal support payments; and
- Private debt, which includes debt from civil judgments, credit card debt, medical debt, student loan debt, etc.
Policy analysts have determined that the newest round of stimulus checks are likely shielded from garnishment to repay tax debt and child support. However, your stimulus check will not be shielded from garnishment to repay private debts.
Congress Working to Pass Legislative Fix
After the Rescue Plan legislation was passed and analysts realized what could happen to these $1,400 stimulus checks, multiple banking industry and consumer protection groups called upon Congress to address the issue through a legislative fix. It appears Congress is listening and taking action. For example, Senator Ron Wyden (D-Ore.), who serves as chairman of the Senate Finance Committee, is already working on new legislation that would expressly protect stimulus checks from being exposed to garnishment by private debt collectors.
Prior Stimulus Checks Were Protected from Creditor Garnishment
Many people were surprised by the fact that the newest round of stimulus checks could be garnished by creditors since the second round of stimulus checks that were dispersed in December 2020 expressly prohibited creditors from garnishing the funds. However, it came to light that the Senate was unable to include the same creditor protection in the latest legislation because of the rules associated with budget reconciliation, the mechanism used to pass the American Rescue Plan through the Senate.
Though, it is worth noting that the very first round of stimulus checks ($1,200 per person) was passed through the traditional legislative system and did not prohibit garnishment by creditors. Nevertheless, multiple states and local governments subsequently passed legal protections to prohibit debt collectors from accessing those funds.
After the creditor issue was brought to light with the first round of stimulus checks, Congress took note and stipulated that the second round of stimulus checks were inaccessible to private creditors. However, as mentioned above, Congress could not include similar protections in the third round of stimulus checks due to the limitations imposed through utilizing budget reconciliation.
How to Protect Your Stimulus Check from Creditors
Many Americans will likely receive their $1,400 stimulus check via direct deposit. As a result, one potential strategy to reduce the risk of those funds being garnished by creditors is to open a new bank account and provide new direct deposit information to the Internal Revenue Service so the stimulus funds are transferred to an account that creditors are not aware of and only you can access. Though, if you are being hounded by a hyper-aggressive debt collector, this strategy may only provide a temporary reprieve from their collection efforts.
New Stimulus Check Cannot Be Garnished to Pay Child Support
If you are only delinquent on child support payments, you will likely still be able to receive a $1,400 stimulus check. It is worth noting that the CARES Act (the first piece of Coronavirus relief legislation enacted in March 2020) did not provide any protections for the first round of $1,200 stimulus checks when it comes to delinquent child support. This meant that many $1,200 checks were seized by state and federal agencies to recover past-due child support. This changed with the second round of stimulus checks and expressly prohibited the garnishment of stimulus checks to pay delinquent child support. The third round of checks features the same protections.
According to the statutory language of the American Rescue Plan, stimulus payments are not subject to reduction or offset for past-due federal or state debts, or by other assessed federal taxes that would otherwise be subject to collection.
Other Payments and Credits at Risk of Garnishment or Reduction
Even though stimulus checks are shielded from garnishment or reduction to pay delinquent child support, the same cannot be said for your tax refund or Recovery Rebate Credit. In fact, if you are delinquent on child support payments and/or have unpaid student loans, the IRS has the ability to withhold a portion, or the entirety, of your tax refund or the Recovery Rebate Credit that could be claimed when you file your taxes.
When Congress issued the first round of stimulus check payments, private banks and creditors were able to seize those payments to recover on outstanding debts. However, multiple states enacted their own laws and regulations that prohibited banks and creditors from garnishing stimulus checks. That is why the second round of stimulus checks were generally protected from being garnished by banks and credit unions. The newest round of stimulus checks is supposed to be protected from bank garnishment.
Stimulus Checks Could Be Reduced to Cover Overdraft Fees
However, an important exception was brought to light revealing other ways in which banks are attempting to utilize the newest round of stimulus checks to bilk money from consumers. Specifically, the loophole is that individual banks have the ability to decide whether they want to use your stimulus direct deposit payment to cover overdraft fees. This is due to the fact that many people will receive their stimulus payments via direct deposit into the same bank account where they also receive tax refunds.
Many large banking institutions such as Bank of America, JPMorgan Chase, Wells Fargo, and Citi Group have publicly stated they would temporarily halt the garnishment of such government benefits to repay overdraft fees, a number of regional and community banks are still garnishing these stimulus checks to pay overdraft fees. If your bank garnished a portion of your check to cover an overdraft fee, it is important to note that you can request a temporary overdraft waiver. Though, the bank has the authority to simply deny the request if it so chooses.
Struggling with Debt? Take Action
If you find yourself feeling weighed down and struggling with extreme levels of stress due to unpaid bills and unmanageable debt, now is the time for action. You may want to consider filing for bankruptcy. Why? Because it gives you a chance to re-organize and discharge various debts so you can take a breath and start a new chapter in your finances. To learn more, fill out the free evaluation form on this page.