Third Stimulus Leaves Americans Vulnerable to Garnishment

Third Stimulus Check from American Rescue Plan 2021Congress has passed another landmark $1.9 trillion relief package to help Americans recover from this financial crisis. However, a technicality in the way the 2021 American Rescue Plan Act was passed has left consumers open to having stimulus checks garnished. Without the protections offered by the two previous rounds of Economic Impact Payments, collectors could take the money people need.

Stimulus Check FAQ

The Coronavirus Aid Relief, and Economic Securities (CARES) Act passed last March was passed by a two-thirds majority vote in the Senate. So was the second round of stimulus.

With this round, Democrats knew that they did not have the support of Republicans. In other words, with the Senate split 50-50 between the two parties, Democrats could not pass the bill using traditional means.

To get the bill passed quickly, Democrats used a special law-making tool called budget reconciliation.[1] This only requires a simple majority vote to pass in the Senate. However, budget reconciliation has specific rules on what Congress can and can’t include in the bill.

It meant that Democrats could not include the $15 mandatory minimum wage in the bill, which garnered big headlines. But another thing that couldn’t be included is the lack of full garnishment protections for stimulus checks.[2]

Yes. Unlike the previous two rounds, there are no built-in protections that prevent garnishment for this latest round of stimulus. The previous checks were fully protected, but this one is not.

That means collectors that have received a court judgment in their favor could potentially garnish your stimulus check. If a collector already has ACH access to your checking account, the risk of them taking your funds is even greater.

“Congress gave Americans this money because it’s critical for many households to cover bills and essentials,” says Gary Herman, president of Consolidated Credit. “However, they’ve left people open to having that money taken to pay off old debt that’s already in collections. That’s a huge risk and consumers may lose big as a result.”

For most debts, a debt collector needs a court order to proceed with any garnishment. The collector must sue you in civil court and win a judgment against you. This gives collectors the right to force repayment through actions such as wage garnishment.

In certain circumstances, you may not even be aware that the collector has received such a judgment. For example, if you received a court summons and either ignored or didn’t respond promptly, the collector may have received a default judgment against you. In this case, you’d also be open to stimulus garnishment.

Certain debts do not require a court order for garnishment. This includes:

  • Court-ordered debts, such as back child support or alimony
  • IRS tax debt if you owe back taxes
  • Defaulted federal student loans

The good news is that the bill did include protections for all these types of debt. The IRS states on their website that, “Under the new law EIP3 [Economic Impact Payment 3] cannot be offset to pay various past-due federal debts or back taxes.”

What’s more, since federal student loans are still in automatic deferment, there’s little risk of garnishment there either.

However, this still leaves private debt collectors who already have civil court judgments free to garnish at will. This could be for past-due credit card debt, medical collections, and utility arrears. State tax offices are also not barred from garnishing your wages—only the IRS.[3]

More changes to the third round of Economic Impact Payments

The lack of garnishment protection isn’t the only thing that’s different about this latest round of stimulus—also known as an Economic Impact Payment or EIP.

  • The Good: Dependents will receive a full payment this time and payments are not limited to dependents under age 17. You will receive $1,400 for any dependent in your household. If you have adult children, a disabled Veteran, or a grandparent living in your household that you claim as a dependent on your tax return, each would be eligible to receive $1,400.
  • The Bad: Income caps are less flexible this time. This means fewer people will qualify for the payments, even if they have dependents living in their household.
    • You are eligible for full payment if:
      • You are single and your adjusted gross income (AGI) is less than $75,000
      • You’re head of household and your AGI is less than $112,500
      • You’re married and have a household AGI of $150,000 or less
    • You are not eligible for any payment if:
      • You are single and your AGI exceeds $80,000
      • Head of household with AGI over $120,000
      • Married with AGI of more than $160,000
    • For anyone in between those two ranges, you’re eligible for a partial payment, but it decreases quickly. The payment is reduced by five percent or $5 for every dollar your AGI is above the full payment income caps.[4]

One thing that has not changed is that you can still look up the status of your EIP using the IRS Get My Payment Tool.

Protecting your stimulus check from wage garnishment

“The best protection consumers can get against collection actions like garnishment is often to get a debt relief plan in place,” Herman explains. “And it doesn’t have to be as extreme as declaring bankruptcy to get an automatic stay that protects against things like garnishment. As long as collectors and creditors know that you’re working to pay them, they will be less likely to take aggressive action such as garnishment.”

One debt relief solution that can help is credit counseling. A certified credit counselor can help you enroll in a debt management program. This can consolidate credit cards, other unsecured debts, and collection accounts into an affordable monthly repayment plan.

The benefits of a debt management program

When you enroll in a debt management program, creditors and collectors agree to accept payments through Consolidated Credit. This means they have a formal plan in place that shows when they will get paid. As a result, they are less likely to sue you in court or pursue other collection actions, such as garnishment.

“Collectors take actions like civil lawsuits and wage garnishment when they believe that’s the only way that they will get paid,” Herman says. “Enrolling in a debt management program shows creditors and collectors you’re serious about repaying your debt. If they know they’re going to get paid, then you’re less likely to face these severe measures.”

A debt management program can also help minimize some of the other negative effects that can bring. For example, most creditors agree to bring past-due accounts current after three payments. This can help stop credit history damage much sooner than if you must repay the full amount owed.

“It’s the right time for people to find a solution for their debt,” Herman encourages. “You may be able to protect your stimulus and set up an affordable repayment plan. Our team is also helping our clients make extra payments when they want to use part of a stimulus to pay off debt. That way, the money can be used in the most efficient way possible.”

Written by :
Meghan Alard [email protected] Financial Literacy Specialist

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