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.
from the March 12, 2007 edition
Page 2 of 3
In January, the federal government began a year-long campaign dubbed "Countdown to Retirement" to encourage new Social Security recipients to choose direct deposit. Cases of lost or stolen checks and fraud are far less common with direct deposit – and the government saves about 80 cents a payment. Direct deposit is a win-win situation, unless the recipient has bad debts.
Many low-income people find it difficult to navigate the legal system, community advocates say.
"Are we going to burden those who are already vulnerable, or are we going to put the burden on the parties who can better absorb the extra effort ... the banks and the judgment holders of debt?" says Gina Calabrese, associate director of St. John University's Elder Law Clinic.
For Severin, losing access to her account was a nightmare. Getting across the city to meet with her lawyer was physically painful, as was going to court to fend off her eviction. It took Severin six weeks to have her funds released, during which she had no access to two months of Social Security payments.
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.
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