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How to stop banks and debt collectors from snatching stimulus payments

Your bank can seize your IRS stimulus money if you owe overdraft fees, late credit card payments, or car loans, and debt collectors can garnish stimulus checks because of a loophole.

Nearly 90 million people have received their stimulus payments according to the IRS.

But while many Americans have received the first round of stimulus payments, some Americans may have their stimulus payments snatched by banks or debt collectors.

When Congress hastily put together the CARES Act, the $2.2 trillion coronavirus relief package, they did not block banks or debt collectors from seizing federal stimulus checks.

How banks can seize stimulus payments

As reported by David Dayen in the American Prospect, banks were given the green light by the Treasury Department to use stimulus payments as offsets for existing debts. Those debts are likely in the form of bank overdrafts.

Unfortunately, many American overdraft their checking accounts with the intention of covering those overdrafts by their next pay date. But with massive job loss occurring, some overdrafts have been left unpaid. If the stimulus money gets transferred into that same account, the bank can use that money to pay off your overdrafts.

Also, if you have a checking or savings account with the bank that issued your credit card or a car loan and you’re behind on payments, the bank can use a “set off” clause in your credit contract to take money out of your account to apply it to the past-due obligation.

How debt collectors can seize stimulus payments

Generally, federal benefits cannot be seized by debt collectors. But since stimulus checks are defined as tax credits and not federal benefits, they are subject to garnishment if a debt collector wins a court judgment.

Currently, some Philadelphia residents are having their stimulus payments being seized due to garnishment orders. In the 90 days before March 20, there were 413 valid garnishment orders in Philadelphia Municipal Court’s small claims division according to the Philadelphia Inquirer.

How to stop banks and debt collectors from snatching stimulus money

Some governors have taken steps to prohibit stimulus checks from being seized. And, in the case of USAA Bank, they were essentially shamed into returning seized stimulus payments taken from military members that owed outstanding debts.

Consider the following to stop seizure of stimulus money:

  • Use the IRS “Get My Payment” tool to opt for a mailed check. But keep in mind, it may be several months before you receive your stimulus check via USPS. Paper checks also may be sent to the wrong address, lost, or stolen. Consumers may incur check-cashing fees and be subject to check scams.
  • Use the IRS  “Get My Payment”  tool to provide a new bank account number at a smaller bank or credit union, or even a prepaid card since creditors are typically not watching these venues.
  • Withdraw any stimulus payment deposited into your bank account as soon as possible if you have an impending garnishment or levy order.
  • If your money has been garnished, you could try to get it back from the bank or file a complaint with your state attorney general, financial regulators, the Consumer Financial Protection Bureau or the Federal Trade Commission.

A group of 25 state attorneys general, led by New York Attorney General Letitia James, wrote US Treasury Secretary Steven Mnuchin a letter to exempt stimulus checks from being seized by private debt collectors. So far, there’s been no policy change.

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