Do Stimulus Checks Have To Be Garnished?

March 12, 2021 at 9:38 am Leave a comment

As early as this weekend credit unions may start seeing stimulus checks hit member accounts. While that is good news for the members it raises operational and legal challenges for both banks and credit unions depending on the sophistication of their core systems. This is a classic example of how operational constraints and bright-line rules can collide with good intentions.

How to handle the direct payments to our members has been a recurring question for the industry over the last year.  The first round of stimulus check legislation did not address garnishment leaving financial institutions having to choose between valid third party levy and restraints and the intent of Congress. In addition many financial institutions have systems that automatically deduct direct payments from negative balances. Many credit unions solved for this problem by reimbursing the member the amount that was setoff.

When it came to the second round of stimulus checks, Congress learned from its mistakes and exempted direct payments from Levy and Restraint as a matter of Federal law.  This development was not only pro-consumer, it was pro-financial institution by giving credit unions and banks the authority not to honor restraints and money judgements.  Why is this so important?  Because under New York law financial institutions which refuse to honor creditor demands can be liable for the resulting damages CSX Transportation, Inc. v Emjay Envtl. Recycling, LTD.

Earlier this week credit unions joined with a large cross section of industry stake holders to request that the latest round of stimulus checks also be exempt from garnishment but the constraints imposed by the reconciliation process made including garnishment exception language in the American Rescue Plan Act of 2021 impractical.   

Let’s assume that Congress doesn’t pass remedial legislation. Without additional guidance the law requires you to honor valid levy and restraints.  As for debts owed to your credit union, you are under no obligation to set-off these funds. Some institutions can put all their member accounts to a neutral balance so that the funds don’t automatically set-off negative balances.  For many institutions this is not a realistic option. What some credit unions have done is refund stimulus payments upon request.  The bottom line is you should all be making plans for how to handle these payments if you haven’t done so already.  Remember, there are not only legal and operational questions to consider but reputational ones as well.

Entry filed under: Compliance, COVID-19, Legal Watch, New York State. Tags: , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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