Are the Second and Third Round of Stimulus Payments Subject to Garnishment?

As the COVID-19 pandemic continues to create financial difficulties and hardship for some Americans, Congress has taken additional steps in the last several months to ease this burden for those Americans impacted the hardest. In follow-up to its initial stimulus package issued in March 2020, Congress issued a second round of stimulus checks to qualifying individuals and families in the 2021 Consolidated Appropriations Act (“CAA”) in December 2020. In March of 2021, with the pandemic still exacting a harsh toll, Congress approved a third round of economic impact payments through the American Rescue Plan Act (“ARPA”). 

While the CAA and the ARPA both provide direct assistance to those affected by the pandemic, the acts differ greatly in how they protect the disbursed funds once they are in the hands of their recipients. The purpose of this article is to flesh out this difference in more detail, and to specifically examine the question of whether, under the CAA and the ARPA, banks, financial institutions, and judgment creditors can garnish, levy, or use some other legal process to collect stimulus check monies from individuals to satisfy outstanding debts. 

Put briefly, ARPA (third-round) payments are not, as of the writing of this article, protected from collection while CAA (second-round) payments are, at least to a significant degree. However, those seeking to collect a debt should exercise caution before seizing assets in an account that unprotected third-round payments were deposited in, since that account may also contain protected CAA payments. 

ARPA Funds Are Collectible By Lenders

Banks, financial institutions, judgments creditors, and other parties can collect on funds received under the most recent round of stimulus checks.¹ The probable reason ARPA payments are not protected is that ARPA passed the Senate via the budget reconciliation process, which allowed the act to survive the Senate with fifty votes (evading the filibuster) but also triggered Senate procedural rules that apparently precluded debtor-protection provisions from being included in the act.² Support for these protections is fairly widespread³ and a stand-alone bill to add the provisions post hoc has been introduced to the Senate, although its prospects are uncertain.⁴ So, even though ARPA payments are currently collectible, there is a slim chance they will not be forever. 

Recognizing this, some states have provided their own protection through enactments preventing the garnishment or levy of amounts received under the ARPA.⁵ Presently, Iowa does not have such a protection in place for consumers, and it does not appear as though such a protection is forthcoming. For borrowers residing outside the state of Iowa, lenders should check applicable state laws or consult an attorney before proceeding with collection efforts that may involve ARPA payments. 

CAA Funds Likely Are Not Collectible By Lenders

In contrast with ARPA payments, CAA payments likely are not collectible by lenders. The CAA provides that:

• The right of any person to any applicable payment shall not be transferable or assignable, at law or in equity, and no applicable payment shall be subject to, execution, levy, attachment, garnishment, or other legal process, or the operation of any bankruptcy or insolvency law.⁶ 

The CAA therefore prohibits lenders from using “execution, levy, attachment” and “garnishment” to collect CAA payments. In Iowa, this prohibition includes garnishments issued under Iowa Code Chapter 642. 

Other forms of collection, such as setoff rights in a loan agreement, may be proscribed insofar as they constitute “other legal process.” But, due to the CAA’s recent enactment, guidance is sparse on what is or is not “legal process” covered by the act, meaning there is uncertainty as to the procedures by which a lender can collect a debt that would implicate CAA disbursements.

Lenders and CAA recipients may not be completely in the dark, though, because the language in this section of the CAA mirrors a portion of the Social Security Act (“SSA”) that provides parallel protections to Social Security recipients. The SSA’s so-called “general exemption provision” prohibits the “execution, levy, attachment, garnishment, or [use of] other legal process” to seize a beneficiary’s benefit payments.⁷ Seemingly, the CAA and SSA sections are highly-similar: four collection methods are specifically identified (execution, levy, attachment, and garnishment) and a catch-all “other legal process” rounds out the list. To the extent these sections are read in parity, SSA cases interpreting the general exemption provision may prove instructive for construing the CAA.  

Take setoff payments under a loan agreement as an example. Setoffs may not be a prohibited “legal process” for collection under the CAA because setoffs are likely not disallowed by the SSA’s general exemption provision. For setoffs to fall within that provision’s “other legal process” clause, setoffs must involve a “judicial or quasi-judicial” mechanism.⁸ However, since a setoff only entails a financial institution exercising its contractual rights without court action, this mode of collection does not activate any judicial or quasi-judicial mechanisms and, accordingly, is not “legal process” under the SSA.⁹ By analogy, a setoff may not be “legal process” under the CAA either.

While following the groundwork laid by the SSA in interpreting the CAA may be persuasive, this theory remains untested by the courts. Without a case or other means of illumination becoming of records, lenders run the risk of running afoul of the CAA in the event a court should choose not to follow the SSA.  

Collection Issues with Intermingled ARPA and CAA Funds

Many individuals deposited both ARPA payments and CAA payments in the same bank account. This intermingling could pose a problem for financial institutions who might have difficulty distinguishing between protected CAA funds and unprotected ARPA funds when processing garnishments or attempting to collect on a past-due debt. 

The CAA provides some clarity on this issue by establishing a procedure for financial institutions to follow when carrying out a garnishment order. Generally, where a CAA payment is deposited in an individual’s account, either by check or electronically, financial institutions must exempt that amount from attachment, garnishment, levy, execution, or other legal process for two months from the date of deposit.¹⁰ Financial institutions are not required to inspect more than the two month “lookback period” when executing a garnishment order.¹¹ Nevertheless, it is reasonable to assume that if an individual can show that amounts more than two months old are CAA payments, those amounts would be exempt as well. Thus, the entire amount of an individual’s account containing ARPA funds may not be subject to garnishment if it also contains CAA payments. 

Conclusion

Lenders likely can collect on payments under the ARPA, while they may not be able to collect amounts received under the CAA. Before initiating a collection effort, lenders should consult an attorney to ensure all funds are not protected under federal or state law. 

For more information on this topic, please feel free to contact a member of our banking and finance practice group.

Simmons Perrine Moyer Bergman PLC is a full service law firm with locations in Cedar Rapids and Coralville, Iowa. For more information, visit spmblaw.com.

Disclaimer: This information is intended for general information purposes only and is not intended, nor should it be construed or relied on, as legal advice. Please consult your attorney if specific legal information is desired.

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¹ Coronavirus Stimulus Payments and Debt Collection, JUSTIA, https://www.justia.com/covid-19/debts-and-bankruptcy-during-the-covid-19-outbreak/coronavirus-stimulus-payments-and-debt-collection/ (last updated Mar. 2021).
² Am. Banking Ass’n et al., Joint Consumer and Banking Trades Letter to the House and Senate: EIP Garnishment – American Rescue Plan, ABA.COM, (Mar. 8, 2021), https://www.aba.com/advocacy/policy-analysis/joint-house-senate-eip-garnishment-american-rescue-plan. 
³ See id. 
⁴ Proposed Bill to Amend the ARPA, MENENDEZ.SENATE.GOV, https://www.menendez.senate.gov/imo/media/doc/garnishment%20bill.pdf (last visited Mar. 30, 2021). 
⁵ Maryland’s governor issued such an order. See Md. Exec. Order No. 21-03-15-01 (Mar. 15, 2021), https://governor.maryland.gov/wp-content/uploads/2021/03/Garnishments-ARPA-3.15.21.pdf.
⁶ Consolidated Appropriations Act, 2021 § 272(d)(2)(A), PL 116-260, December 27, 2020, 134 Stat 1182 [“CAA”].
⁷ See 42 U.S.C. § 407(a) (stating that “[t]he right of any person to any future payment under this subchapter shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this subchapter shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law”). 
⁸ See Lakewood Credit Union v. Goodrich, 887 N.W.2d 342, 352 (Wisc. Ct. App. 2016) (holding setoff payments of benefits already deposited into beneficiary’s account were not barred by the SSA); see id. (citing Washington State Dep't of Soc. & Health Servs. v. Guardianship Est. of Keffeler, 537 U.S. 371, 385 (2003) (defining “other legal process”)). 
⁹ Id. at 351–52.
¹⁰ See CAA § 272(d)(2)(C)(i)–(ii); see also Year-End Appropriations Bill Protects Payments to Individual Taxpayers from Private Creditors and Debt Collectors, 24 No. 14 Consumer Fin. Services L. Rep. 3 (Jan. 26, 2021). Electronic payments that have been “encoded” appear to be categorically exempt from collection during the relevant period, while payments that are not encoded are exempt for that time only “upon the request of the account holder.” CAA § 272(d)(2)(C)(i)–(ii); Year-End Appropriations Bill Protects Payments to Individual Taxpayers from Private Creditors and Debt Collectors, 24 No. 14 Consumer Fin. Services L. Rep. 3 (Jan. 26, 2021). 
¹¹ See CAA § 272(d)(2)(C)(i)–(ii); see also Year-End Appropriations Bill Protects Payments to Individual Taxpayers from Private Creditors and Debt Collectors, 24 No. 14 Consumer Fin. Services L. Rep. 3 (Jan. 26, 2021).