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

In 2004, Virginia courts were the first of a handful of state courts to amend restraining notices to prohibit banks from freezing accounts that contained only exempt funds. But after the Virginia Bankers Association (VBA) met with court officials to argue that the change flouted Virginia law, the court reinstated the old forms.

In other states, consumer attorneys are attempting to get banks to change their practices through litigation. Severin's lawyer, Johnson Tyler of South Brooklyn Legal Services, is cocounsel for a suit alleging that a New York law requiring banks to honor restraining notices without finding out if an account has exempt funds violates consumers' due-process rights. A suit in North Carolina alleges that Wachovia bank's honoring of restraining orders on accounts having exempt funds is illegal.

Banking associations say banks shouldn't have to determine if funds should be frozen. "Putting banks in a position of acting like a judge in determining whether funds are exempt is an unfair requirement to put on private entities," says Jay Spruill, VBA's general counsel. The decision isn't always cut and dried, he says: Social Security funds aren't exempt from garnishment for tax restraints and child support, and accounts may contain both exempt and nonexempt funds. And if banks mistakenly freeze or fail to freeze funds, they open themselves up to a lawsuit from the aggrieved party, he notes.

Though many who bring the restraints to the attention of their creditors have the dispute resolved within days, people who get Social Security payments by direct deposit stand to lose access to more money, for longer, than those who get a paper check. Two Social Security payments may be deposited into a frozen account before an account holder can switch to a paper check.

Some banks, however, have implemented systems to protect Social Security funds from improper garnishment. New York Community Bank (NYCB) checks to be sure an account does not consist of exempt funds before freezing it. In an affidavit, John Fennell, NYCB vice president, said the policy "has been effective in protecting depositors" and has not been a burden to the bank.

California and Connecticut have laws prohibiting banks from restraining a certain amount of funds in accounts containing directly deposited Social Security payments.

Some advocates say it's in a bank's interest to restrain accounts. Banks receive substantial fees to freeze an account and for bounced checks, says Mr. Tyler, staff attorney at South Brooklyn Legal Services. Severin was charged $380 in bank fees relating to her restraint, money Tyler eventually recovered.

Attorneys representing the banks against which Tyler is bringing the New York lawsuit would not comment on issues surrounding ongoing litigation, but bank fees "absolutely did not" enter into VBA's decision to oppose the new restraining notices, says Phil Boykin, VBA's vice president and director of government relations.

In the meantime, Tyler has warned Severin that her account is likely to be frozen again, since creditors can issue a new restraining notice after a year. Severin's account was refrozen a second time last April. But now she's prepared: While she still receives her Social Security payment by direct deposit, every month she gets a paper check from Social Security for her daughter.

"Every month, I physically take my daughter's paper check to the bank," she says. "That way, I won't be totally devastated without any cash."

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