Creditors use loophole to seize funds

Lawmakers from both parties who have been pressing the Treasury Department for years to close the loophole with new regulations are growing impatient. The Obama administration is now promising action but has offered no timetable for developing the new rules.

Federal law has long protected Social Security and veterans benefits from most creditors, with a few exceptions for child support, alimony, unpaid federal taxes, and debts to other federal agencies. But creditors have been seizing the payments anyway by getting court orders to freeze and garnish bank accounts that receive the benefits through direct deposit.

Activists say the issue has festered for years, but has intensified as more recipients get their benefits deposited directly into bank accounts.

Many people who receive Social Security or veterans benefits can't afford to have their bank accounts frozen for even a short period of time, said Margot Saunders of the National Consumer Law Center. It's hard to hire a lawyer to get your money back when all your resources are frozen, she said.

"They take all your money, and they take it illegally," Saunders said. "But when you live on $700 or $800 a month and have all that money garnished, there's very little recourse."

Bankers say they are often confronted with court orders to garnish accounts that include deposits from multiple sources - including money that is not protected from creditors. They often respond by freezing the account while the bank customer and the creditor resolve the issue, said Mark Tenhundfeld, a senior vice president of the American Bankers Association.

"The banks want to do the right thing," Tenhundfeld said.