13.5.7 Due Process Issues When Account Is Frozen upon Bank’s Receipt of Garnishment Notice

In general, state bank account garnishment procedures contemplate that the bank will freeze the debtor’s bank account upon its receipt of a garnishment order. Many state laws specifically authorize the bank to freeze only non-exempt funds.²⁹² However, some state laws may be interpreted to require a bank to freeze a debtor’s bank account upon receipt of a garnishment notice, even if the account consists wholly or partially of exempt funds, such as Social Security benefits. The account remains frozen until the debtor obtains a ruling or an acknowledgment by the creditor that the funds are exempt—a process that may take weeks.

Due process litigation in the 1970s focused on informing the borrower of the procedures to claim exemptions and the need for a prompt resolution of exemption claims but did not generally protect exempt funds from being frozen while those procedures took place. A 2005 district court decision, Mayers v. New York Community Bankcorp, Inc.,²⁹³ takes a fresh look at the constitutionality of freezing the debtor’s bank account in light of technological changes. In particular, the court noted that the Social Security Administration’s requirement that beneficiaries receive payments electronically, unless they specifically opt out, has increased the risk and severity of erroneous deprivation and decreased the burden of determining whether bank accounts contain only exempt funds. Balancing these factors, along with the government’s interest in avoiding clogging up the courts with exemption claims, the Mayers court held that the plaintiffs had the right to proceed on their claim that the New York bank account garnishment procedure denied debtors procedural due process by allowing accounts that contained only exempt electronically deposited Social Security funds to be frozen upon service of the garnishment order. A subsequent decision, Granger v. Harris, also finds that the constitutional balancing test may dictate a different result than previous cases because of the new realities.²⁹⁴

There is also an argument, not yet reached by the courts, that the Supremacy Clause requires that federal exemptions trump any state law procedures that would defeat the efficacy of the federal exemptions by allowing the benefits to be frozen in the consumer’s bank account.²⁹⁵ Even if it is proper for state procedures to apply to garnishment of funds exempt under state law, they should not apply to benefits that are exempt under federal law, when those state procedures affect federal substantive rights. Many state statutes were enacted long before direct deposit of federal benefits and even before the existence of exempt benefits under federal law. It would be odd if funds exempt under federal law could be forfeited when the consumer fails to follow a state-required procedure.

The New York garnishment law at issue in Granger and Mayers has subsequently been changed to protect exempt funds more effectively.²⁹⁶ Pennsylvania has also changed its bank account garnishment procedures so that banks are now instructed to freeze only non-exempt funds, and service of the writ will not attach funds in an account in which funds are direct-deposited on a recurring basis and identified as exempt under state or federal law.²⁹⁷ Connecticut²⁹⁸ and California²⁹⁹ provide that some amount of benefits are exempt without a claim being made.³⁰⁰ A debtor’s failure to claim the exemption does not result in waiver.³⁰¹ In all four states, however, the debtor must file a claim to prevent the freezing and turnover of any additional exempt amount over and above the amount protected from an initial freeze.

A 2011 rule adopted by the Treasury Department and other federal agencies resolves many of these concerns. It requires banks to protect approximately two months of electronically deposited exempt federal benefits. While the Treasury rule has some gaps, it goes a long way toward resolving the problems of freezing exempt federal benefits. It is discussed in detail in § 14.5.4 infra.