Income Tax and Social Security Benefits

images (2)Upon receiving a favorable decision in your claim for Social Security benefits, it is the natural tendency for claimants to breathe a sigh of relief and start planning how to spend the award money. Maybe past due bills will finally be paid off; or perhaps an item of necessity that has long been needed will finally be purchased. It can be a liberating feeling knowing that, at long last, monetary help is on the way. But before claimants commence spending their award, it is imperative for them to understand certain tax implications so potential problems with the IRS down the road can be avoided from the onset.

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Can Debt Collectors Garnish My Social Security Payments?

downloadIf you are an elderly or disabled American-or are receiving Social Security Payments for any other reason-you may fear that debt collectors could seize or garnish your income. The debt collectors may have suggested they could, or would do so if you do not pay them. Can they do it?

Read the Whole Answer!

If you are dependent upon Social Security in any way you must read this entire article. You must read on beyond the simple answer because a little knowledge can be a dangerous thing-and it is specially dangerous here. The real answer is different than the short answer.

The Short Answer

The short answer as to whether debt collectors can garnish Social Security is that, No, they cannot. Section 207 of the Social Security Act provides that: “none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.” However!As with so many things in the law, the simple answer is only the beginning of the question.

The Real Answer

Let’s consider the way bank accounts are seized or “garnished.” What happens is that someone obtains a judgment against another person. As I have pointed out before, these judgments often come as a result of default judgments-all too often against people who never owed anybody any money. But once there is a judgment, it is “collectible.” The collectors have a right to, and often do, go to the supposed debtor’s bank and serve a garnishment notice on the bank without providing any notice of that fact to the debtor.

The garnishment takes effect immediately and “freezes” the account. The bank will not honor any outstanding checks (unless the account balance is larger than the debt owed) until the account becomes “unfrozen.” The bank then prepares and sends notice to the debtor. As far as I can tell, the bank is rarely in a hurry to do this: they will be charging overdraft or NSF fees for every check that bounces. It is a tremendous windfall for the bank. A few days later, the horrified debtor learns that his or her checks have been bouncing and huge fees accumulating.

Frozen Accounts Mean No Money Even If the Money Cannot Be Legally Garnished

In most states, the banks hold the assets they seize for a period of time before turning them over to the debt collector. During this time, the debtor can-if they have the resources and emotional presence of mind-challenge and stop the garnishment. But this takes time, at best. And during that time a person of limited income could be evicted, be unable to purchase medicine, or other essentials. And the banks are charging fees which they may, or may not, ever return.

There have been a number of news accounts of collection activities in New York City and elsewhere. The debt collectors were garnishing the bank accounts of the elderly whose accounts were undeniably largely-and often exclusively–made up of Social Security payments. During the litigation to untangle the amounts of garnishable versus ungarnishable amounts, the elderly were facing homelessness and other deprivations. Some of them died, and hundreds of thousands or millions were subjected to extreme hardship and crisis.

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Lose Social Security Benefits If You Don’t Pay

images (1)A vast majority of people take out student loans to pay for higher education. The Supreme Court has decided to make social security benefits a means of repaying them.

No Benefits For You!

While millions borrow money to attend college and graduate school, not everyone pays this money back. The failure to pay can result from circumstances such as a slow job market, failure to finish school and health problems. Of course, there are the select few who simply welch on the repayments. The U.S. Supreme Court rendered a decision on December 7, 2005, impacting people who are behind in paying their loans.

In Lockhart v. United States, the Supreme Court was asked to rule on whether the federal government could seize social security benefits to cover outstanding student loans. The case involved James Lockhart, a disable man, who sued to stop the government from cutting his monthly $874 check. Lockhart suffers from heart disease, diabetes and other health problems and lives in public housing in Seattle. He argued the forfeiture of part of his check made it impossible for him to continue to buy his medication and food. The Justices disagreed with Lockhart.

Under federal law, efforts to collect defaulted student loans had a 10 year limit. Put another way, the federal government was barred from hunting down delinquent payers after ten years. In the past few years, however, Congress did away with this limitation, which brought forth a conflict of law. The Social Security Act contains language protecting benefits from being seized as part of debt actions. In this case, the Supreme Court ruled that such protections only apply to private individuals, not the federal government. In short, social security benefits are no longer safe.

Currently, the total balance on outstanding student loans is roughly $30 billion. Of this amount, roughly seven billion are delinquent or defaulted loans. With 25 percent of loans in the red, one can see why the government has an interest in collecting the debt.

Personally, I don’t have any problem with this ruling. If you borrow money to go to school, you should pay it back. Failing to do so could deprive others of the same opportunity.

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