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

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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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