In the federal government’s ongoing effort to revive the U.S. economy and help people harmed by the economic damage wrought by the coronavirus pandemic, an important detail has gone under-noticed: the most recent set of federal stimulus payments to individuals are subject to garnishment by creditors. And this fact is creating legal and operational challenges for the banking industry.
Unlike the federal stimulus payments provided to individuals and families pursuant to the Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act,” Pub. Law 116-136, 134 Stat. 281) and the Consolidated Appropriations Act of 2021 (Pub. Law 116-260), the federal stimulus payments provided under the American Rescue Plan Act of 2021 (Pub. Law 117-2) are not exempt from garnishment by creditors under federal law. Within the banking industry, the three rounds of payments from the U.S. Treasury Department – known as “economic impact payments” – are commonly referred to as EIP1s, EIP2s, and EIP3s, respectively. In the absence of Congressional action, however, several states have stepped in to provide garnishment protection for EIP3s through various directives or guidance. In addition, some banks and financial institutions are voluntarily seeking to protect EIP3s either individually or through coalitions, although not required to do so by either federal or state law.
The American Rescue Plan Act, which was enacted on March 11, 2021, is a massive, $1.9 trillion COVID-19 economic stimulus law. The legislation provides targeted economic relief, in part, through EIP3s in the amount of $1,400 for individuals earning up to $75,000 and $2,800 for couples earning up to $150,000. Those amounts phase out quickly, so that individuals earning between $75,001-$80,000 and couples earning between $150,001-$160,000 receive only partial EIP3s, and individuals who make more than $80,000 and couples making more than $160,000 do not receive any payments at all.
The reconciliation process used by Democrats to pass the American Rescue Plan bill in the Senate did not permit the inclusion of certain legislative text and, in the case of EIP3s, language protecting such payments from garnishment by creditors was not added. To fix this issue following enactment of the American Rescue Plan Act of 2021, Senators Robert Menendez (D-NJ), Sherrod Brown (D-OH), Ron Wyden (D-OR) and Chris Van Hollen (D-MD) jointly introduced standalone legislation (S. 823) on March 17, 2021 that would protect EIP3s from garnishment by creditors. (The language was purportedly identical to anti-garnishment language contained in the Consolidated Appropriations Act of 2021, although according to Congress.gov, the bill text is not yet available.)
On March 18, Senator Brown and Senator Wyden attempted to advance S. 823, the EIP3 garnishment protection bill, and called for its adoption by unanimous consent. Unfortunately, Senator Pat Toomey (R-PA) objected, and his single objection rendered that bill effectively dead. Although theoretically the federal bill could be resurrected, that seems highly unlikely, and the issue is now largely moot since the Treasury Department has already issued the majority of the EIP3s. As a result, EIP3s are not currently protected from garnishment by creditors under federal law.
In light of Congress’ failure to provide protection for EIP3s from garnishment by creditors, several states have sought to protect EIP3s over the past few weeks. At least one state, New York, has sought to protect EIP3s through legislation, whereas other states have issued executive orders, guidance and directives. Examples of executive actions include the following:
- On March 15, 2021, Maryland Governor Larry Hogan issued Executive Order 21-03-15-01 prohibiting garnishment of EIP3s. The Executive Order provides that EIP3s are exempt from garnishment, and all financial institutions are ordered to consider these payments as protected amounts that cannot be subject to a court-ordered garnishment.
- On March 17, 2021, Massachusetts Attorney General Maura Healey issued guidance advising that EIP3s are protected from garnishment by creditors and debt collectors. The AG’s guidance states that EIP3 assistance payments constitute “public assistance” under Massachusetts law, and, as such, EIP3s are exempt from garnishment or attachment. Any attempt to garnish, attach or otherwise seize these funds to collect or attempt to collect a debt violates the Attorney General’s Debt Collection Regulations.
- On March 24, 2021, Governor Phil Murphy signed Executive Order No. 233, which provides that EIP3s issued to New Jersey residents under the American Rescue Plan Act of 2021 are exempt from any attachment, levy, execution or garnishment by creditors. The Executive Order continues to allow for garnishment in connection with any action for, or any judgment awarding, any child support, spousal support, or family support, or any criminal restitution payable to victims, however.
- On the same date, New York Attorney General Letitia James issued guidance to New York state banking institutions, creditors, and debt collectors clarifying that EIP3s issued under the American Rescue Plan Act of 2021 are exempt from garnishment under New York law. In her press release accompanying the guidance, AG James stated that “any institution that violates this guidance will be held accountable to the fullest extent of the law.” AG James’ guidance is based on multiple state and federal consumer protection laws and clarifies that any attempt to garnish EIP3s from New Yorkers will be treated as a violation of those laws. The guidance advises banking institutions that EIP3s will follow similar legal processes as other public benefits (such as public assistance, social security, and veterans’ and retirement benefits), and any person or entity that garnishes or attempts to garnish these payments will have violated multiple state and federal consumer protection laws.
Although gubernatorial executive orders and state attorney general guidance usually do not have primacy over state garnishment laws, state laws often confer broad emergency powers upon state officials to mitigate consumer harm during crises like the COVID-19 pandemic. However, each order or directive should be analyzed to determine whether it is legally valid. As a general matter, so long as the state executive order, directive or guidance articulates a basis that is rationally related to state laws upon which they rely, we believe financial institutions should follow them and state their reliance upon those documents in response to court garnishment orders and creditor/customer communications.
Meanwhile, the CFPB issued a statement on March 17, 2021 encouraging financial institutions and debt collectors to permit EIP3s to reach consumers without being “intercepted” to cover overdraft fees, past-due debts or other liabilities. The CFPB stated that it applauded the actions of states that have taken rapid action to protect EIP3s and vowed to “closely monitor consumer complaint data and other information that will help [the Bureau] better understand how these issues are affecting consumers.” The Bureau also favorably noted that recently “many financial industry trade associations [have been] in dialogue with the CFPB [stating] they want to work with consumers…to take proactive measures to help ensure that consumers can access the full value” of their EIP3s.
Toward that end, state banking trade associations have worked behind the scenes with state legislators and state executives to help develop and/or advocate for legislation or directives that would protect EIP3s. In addition, some financial institutions are voluntarily seeking to protect EIP3s for their customers, either on an individual institution basis or through coalitions. For example, New Jersey Governor Phil Murphy issued a press release on March 24 announcing that he had secured support from 50 federal and state-chartered banks and credit unions, including several major banks, to protect EIP3s for New Jersey residents, and more financial institutions are expected to sign on. Governor Murphy noted that the New Jersey Bankers Association and the CrossState Credit Union Association have endorsed this initiative and have encouraged their members to adopt these policies.
These voluntary actions by financial institutions, if not grounded in a state order, directive or guidance, are in the nature of requesting that creditors avoid garnishing EIP3s or advising their customers upon receipt of a garnishment order to permit the customer to raise any legal objections they may have with the creditor. Financial institutions’ voluntary actions may also involve restraint from exercising the right of setoff (which arise under state law) against outstanding debt owed by the customer to the institution.
In summary, EIP3s are not protected from garnishment by creditors unless a state has chosen to act to protect them through a valid directive or a financial institution has voluntarily taken steps to do so, although not currently required to do so by either federal or state law.
Analyzing these legal issues and determining how to try to protect EIP3s operationally is already creating significant challenges for financial institutions when presented with a state court garnishment order. Garnishment departments should consult legal counsel concerning how to navigate these issues and mitigate legal, operational and reputational risks going forward.