Direct deposit of Social Security checks: safe, fast – and disastrous

As federal agencies push for recipients to use direct deposit, consumer advocates warn of risks.

By Simone Baribeau | Contributor to The Christian Science Monitor

from the March 12, 2007 edition

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NEW YORK - Michele Severin says she has thousands of dollars in credit-card debt and no way to pay it. A single mother in Brooklyn, she and her young daughter live on $1,300 a month in government Social Security disability payments – far less than the $50,000 a year she earned as a New York City bus driver before an injury in 1989 knocked her off the job.

To protect herself from creditors, she considered filing for bankruptcy, but the attorneys' fees were too high for her and she figured creditors couldn't garnish Social Security. Assuming the money was safe, she set up direct deposit, which is less expensive, more secure, and faster than depositing the money in person. But in March 2005, her bank froze the funds, and Ms. Severin, unable to pay rent, found herself in court fighting an eviction.

Severin's case is not unique. As the federal agencies begin another push for recipients to accept their Social Security checks by direct deposit, consumer advocates point to a little-known risk of using the system: Recipients who have judgments against them are vulnerable to losing access to their money.

The problem, advocates say, isn't the direct-deposit system, but the failure of banks to implement safeguards to protect accounts with exempt funds from being frozen.

Now some state courts are requiring financial institutions to verify that an account does not contain 100- percent exempt funds before freezing it, and legal aid attorneys are bringing lawsuits to force banks to ensure that the money they restrain can legally be garnished.

Banks say they are caught in the middle of a legal dispute that is not their responsibility to resolve.

For people living on Social Security, losing access to their bank account can be devastating, community advocates say. "When someone has an account which is exclusively made up of Social Security funds, it's likely these are their only funds," says Margot Saunders, counsel for the National Consumer Law Center (NCLC). "When their accounts are frozen, they have no money to pay rent, buy food, transportation, or go to the doctor."

Although no hard data exists on the amount of exempt funds frozen by creditors, community advocates say it's a serious issue. "This is an exploding problem," says Ms. Saunders, noting that legal task forces in several states are working on the problem.

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