Thursday, March 24, 2011

New Federal Rule Makes It More Difficult for Judgment Creditors to Garnish Consumer Bank Accounts

Florida is one of the most consumer-friendly States in the Union, when it comes to debtor-creditor relations. Article X Section 4 of the Florida Constitution exempts from forced sale a person's primary residence, without regard to the value (subject only to an acreage limitation that very rarely applies). Separately, Section 222.11 of the Florida Statutes provides protection over and above the Federal Wage Garnishment restrictions, exempting from garnishment 100% of the wages of a head of household, unless that person has agreed to have his wages garnished (a scenario I have yet to come across). And if that weren't enough, the commonlaw tenancy by the entireties form of property ownership protects the property of a married couple from creditors of one spouse. We have blogged about each of these exemptions here, here, and here, respectively.

One exception to this pro-debtor body of law is the Garnishment statute itself. Many states require either notice to the debtor or a specific showing by the creditor of entitlement to would-be-garnished funds - including the lack of any available exemption - prior to garnishing wages or bank account funds (some states may require both). Florida requires neither. The creditor need only show the existence of an outstanding judgment in order to obtain a Writ of Garnishment, and he can obtain the Writ without notice to the debtor. Only after the garnishee (the party possessing the debtor's property to be taken) has been served with the Writ does the debtor receive notice, and it is then up to the debtor to raise his exemptions in a timely fashion and prove them in accordance with the statute or lose the right to the funds. And while this litigation takes place, the funds are frozen in the debtor's bank account and are therefore unavailable to him for some time. As such, a bank account garnishment is an effective creditor's remedy in Florida.

New Federal Regulations becoming effective in May 2011 will lessen its effectiveness, however, at least as it pertains to Social Security payments and other Federal benefits. The interim final rule requires a bank, upon receipt of a Writ of Garnishment, to conduct its own inquiry into the source of the funds in the garnished account, and if it determines that the account contains Federal benefit payments, to release the freeze on two months' worth of payments immediately, without any showing by the debtor.

Both Florida and Federal law have for some time exempted many kinds of Federal benefit payments from garnishment, even after they are deposited into an account, so this interim final rule does not represent a drastic change in the law. But inasmuch as it relieves the debtor of the obligation to prove that the funds are exempt before regaining access to at least a portion of them, its effect will be felt by creditors- many times the debtor is unable to prove that the funds are exempt, has taken an action that would otherwise make the exemption unavailable, or (unfortunately) is simply unaware of or incapable of complying with the procedure for obtaining judicial recognition of the exemption. Additionally, this rule should be of interest to banks, who should be hard at work learning their duties under the regulations and implementing procedures to carry them out.

The interim final rule was published in the Federal Register, and is available, along with comments submitted to the implementing agencies, here.