Untangling the Safety Net: ProtectingFederal Benefits from Freezes, Fees,and Garnishmentt

I. Introduction"I'm sorry, your card has been declined." These words may trigger a range of emotions from mild embarrassment to frightened panic. They may also inform veterans' widows, disability benefits recipients, and retirees that their bank accounts - accounts often holding their only means of subsistence are frozen.1 Encouraged by the government to have their benefits checks directly deposited into bank accounts,2 and under the (legally valid) impression that private creditors do not have the right to seize their benefit money,3 these vulnerable citizens nonetheless cannot access their funds. How did this happen?When the accountholder contacts the bank, she will discover that a creditor has filed a garnishment order against her account, which the bank has frozen. To remedy the situation, she must go to court for a hearing. Weeks will pass before she can access her funds, and even after the law has exonerated her - by determining that the creditor never had a right to the funds in the first place- the bank will charge her a substantial fee for the "service" of garnishing her account, as well as fees for any checks written and returned during the freeze.4 She will likely request to receive all future benefits checks through the mail, subjecting her to check-cashing fees, the danger of carrying cash, and delays in payment receipt - the problems that direct deposit was designed to avoid.To be sure, in most cases the benefit recipient voluntarily incurred the debt that ultimately led to the garnishment order and subsequent account freeze. Be that as it may, federal law prioritizes beneficiaries' claims to their funds over the judgments of standard creditors.5 Thus, the scenario described above defies congressional intent. Freezing accounts based on garnishment orders directed toward exempt funds finds no support in policy considerations. Bank fees made pursuant to the freeze also run contrary to the public interest. As a consumer advocacy group recently noted: "It makes no sense ... for the American taxpayer to be expending millions of dollars on a yearly basis to help recipients avoid destitution, only for substantial portions of these funds to be siphoned off by the banks that are distributing their funds."6Congressional intent to preserve beneficiaries' rights and access to subsistence funds currently lies tangled in a web of widely diverging state laws and bank policies. This Note calls for disentanglement - ideally through detailed, comprehensive legislation. This legislation should facilitate automation of exempt fund identification, ensure recognition of priority creditors,7 require banks to assert exemptions on behalf of debtors, prescribe a uniform accounting method, and provide an enforcement mechanism. While legislation effectuating diese elements would have placed an onerous burden before the information age, banking technology makes compliance significantly easier today.8 Practical problems are surmountable; Congress needs only the political will to act.Structurally, this Note first illustrates, in Part II, the process through which "exempt funds"9 in bank accounts are frozen by the banks and potentially paid to the creditor if the beneficiary10 fails to act in time or effectively. Part ?? then describes and evaluates federal and state statutes bearing upon exempt fund garnishment, surveying the laws of all states and focusing on the specific procedures in Virginia. Part IV examines Due Process and Supremacy Clause challenges to state garnishment statutes that provide inadequate beneficiary protection, contending that all state laws violate both clauses to varying degrees. Moving from the process and law as they currently exist to the process and law as they should be, Part V identifies public and private action that would remedy or alleviate me problems of freezing and garnishing exempt funds. Part VI assesses die approaches suggested in Part V, finding private action inadequate, finding promise in federal regulatory and state legislative action, and recommending congressional legislation as the optimal method of beneficiary protection. …