The Debt Collector vs. The Widow

Viola Sue Kell thought her Social Security benefits were safe in the bank. She was wrong.

By ELLEN E. SCHULTZ  |  Wall Street Journal

Originally Published in 2007

Image result for Viola Sue KellHeart surgery halted Viola Sue Kell’s work sewing carpets in a rug mill in 2001. It was the end of 40 years of cleaning motel rooms, restaurant jobs, “just hard stuff,” says Mrs. Kell, a 64-year-old widow. She applied for Social Security disability, and her monthly $827 benefit now is her only income. But when Mrs. Kell tried to pay her mortgage and electric bills in 2004, her checks bounced. Every cent of the Social Security check, which went straight to her bank each month, had been taken by a debt collector that had garnished her bank account.

Federal law says creditors can’t take Social Security and Veteran’s benefits to pay debts. (See the assignment online.) Yet the practice is widespread. There is no established process for enforcing the federal prohibition.

When banks receive a garnishment order, their standard response is to freeze the customer’s account. Banks say it’s not their job to check whether accounts contain cash from exempt sources. Collectors also don’t treat it as their job. So the burden falls on Social Security recipients, typically elderly or disabled, who have suddenly lost access to their bank accounts and have no idea what to do.

In 2003, a debt collector decided Mrs. Kell in Alabama owed $125 on a three-year-old hospital bill. It obtained a court judgment and sent a garnishment order to her bank. The bank froze her account, which contained $679, all from Social Security. “I was scared to death,” Mrs. Kell says. “I didn’t have any way of getting any money.”

At a loss, she looked in the yellow pages for a lawyer. “I’m not very good with things when it comes to law. My husband took care of all that,” she says. She found a legal-aid office 60 miles away from her rural home and drove over the mountain with her bank statements and Social Security papers.

What Mrs. Kell didn’t know was that account holders can file a claim with a debt collector to have any funds that came from Social Security or Veteran’s benefits exempted. But federal law doesn’t say who should tell them this. Even Social Security’s Web site doesn’t. (See the relevant item in Social Security’s FAQ page.)

“The Social Security Administration’s responsibility for protecting benefits from legal process ends when the beneficiary is paid,” said a spokeswoman. She said if benefits are taken “as part of a legal process,” beneficiaries can cite the exemption “as a defense against such actions.”

Legal Services Alabama helped Mrs. Kell file an exemption claim, and her bank, First Federal in Fort Payne, Ala., released her account. The bank said it had frozen it
because it must comply with court orders. “It’s not a bank’s place to raise an exemption claim for a customer,” said a First Federal lawyer. “It would be overwhelming.”

The garnishment process can be rewarding for banks. When they restrain an account, they collect a range of fees — for imposing the freeze, for the resulting bounced checks, or for short-term loans to prevent bounced checks. If the account contains Social Security, banks commonly collect these fees and their loan repayment out of those exempt funds. Banks argue that the ban on collecting debts out of Social Security benefits doesn’t apply to them.

Worsening the problem, paradoxically, is direct deposit of benefit checks. This is meant to make benefits more secure. It means “you can rest assured your money is safe,” says the Social Security Web site. (See the Web site.) Direct deposit became mandatory in 1999 unless beneficiaries opt out, and more than 80% of recipients of
regular Social Security use it, as do a majority of disability recipients. But direct deposit has had an unintended result: an infrastructure that makes it cheaper and easier for collectors to pursue elderly or disabled subjects of old debts. These people can be hard for collectors to find, sometimes because they’ve moved to retirement areas. But debt collectors, knowing that millions of retirees are having money sent straight to banks, can electronically ask a large bank if a given individual has an account with the bank anywhere in the U.S. If a direct-deposit Social Security account turns up, the collector garnishes it.

Mrs. Kell decided to get her Social Security check by mail, and had to drive 12 miles to cash the check at a Wal-Mart and buy money orders to pay bills. (Later, after her lawyer spoke to the bank, she resumed direct deposit.) She gets food donations from First Baptist Church and free garden seeds from a Methodist group. “I’m
pretty well fixed for food,” Mrs. Kell says. Once she’s done paying off her debts, she says, she hopes to save enough money to visit her husband’s grave in Georgia.

While collectors can take many of the steps to garnish an account electronically, it’s up to seniors and the disabled to file physical papers to prove their benefits are exempt. As a practical matter, if they don’t get help from a lawyer, they may not know their funds are exempt. And depending on the state they live in, if they don’t claim an exemption in time — generally between 10 and 30 days — benefits that were garnished can be lost for good.

Dolores and Robert Weise moved to a mobile home in Hernando, Fla., from New Windsor, N.Y., three years ago, looking for a cheaper place to live. Robert, a 70-year-old former paper salesman, was fighting colon cancer, and the medical bills “put us down the drain,” says Mrs. Weise, 65. She opened an account at a Florida
branch of Wachovia Corp., which received their Social Security by direct deposit. In July 2005, Mrs. Weise tried to withdraw $20 at an ATM for chemotherapy co-payments. But her account was frozen. The bank had received a garnishment order.

Mrs. Weise didn’t know Social Security was exempt and the bank didn’t tell her, according to an account from her that is supported by correspondence among Mrs. Weise, the bank and the debt collector. The bank told her to take up the matter with the collector, a New York firm called Mel Harris & Associates. The collector also didn’t tell her funds were exempt, according to Mrs. Weise. But she says it told her that if she authorized her bank to wire it $3,109 for an old credit-card debt, Harris would lift the garnishment order.

Collectors obtain such orders by suing debtors, usually in small-claims court. These clogged courts issue the orders routinely if the named debtor doesn’t show up or fight the request, for any reason. Sometimes, the reason is that a summons was sent to an old address. In the Weises’ case, the garnishment order shows the summons was sent to an outdated address in New York state.

At her bank, Mrs. Weise says, “I was on my knees. It was like our last dollar. I didn’t even have money to buy gas to get home.” Distraught, she authorized the bank to send Mel Harris the money. The bank then unfroze her remaining funds, minus a $108 processing fee.

Mel Harris declined to comment. Wachovia said it couldn’t comment on a customer because of privacy rules but is “committed to protecting the safety of our customers’ funds while complying with state and federal law.” It said state codes provide instructions for customers to claim their exemptions. “We are required to honor valid garnishment orders and are simply following the rules and regulations set forth in federal and state laws,” said a bank spokesman.

However, the garnishment order for the Weises’ account stated: “Funds defined as ‘exempt’ or otherwise excluded under applicable law must not be restrained under this notice.” The Wachovia spokesman said banks “are not in a position to determine the character of funds at any given point in the account.” Garnishment orders often originate with big debt buyers that acquire large portfolios of old debts written off by credit-card firms, retailers and so forth. In the Weises’ case, a debt buyer had purchased a batch of old creditcard debts and hired Mel Harris to try to collect them. Debt buyers and collectors obtain millions of garnishment orders each year.

A trade group representing debt buyers said they have “a positive role in the economy, returning to creditors a portion of their investment, which benefits consumers in the form of more credit and lower interest rates.” Barbara Sinsley, general counsel of the group, DBA International, added: “It isn’t the intention of debt buyers to garnish exempt funds.”

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