Answer: Sutton's Law. Because that's where the money is.
An assortment of State and Federal statutes provide a variety of debtor exemptions for retirement benefits, worker's compensation benefits, alimony payments and more. Generally, this means that creditors cannot go directly after the source of these funds and garnish them before they are paid. However, once these benefits are paid to the debtor and the funds are deposited in the debtor's bank account, it is a different issue. Are these exempt benefits subject to a bank garnishment?
In Matthews v. Lewis, 617 S. W. 2nd 43 (1981), the Kentucky Supreme Court addressed the following issue:
"The question presented by this case is whether assets received from a statutorily exempted source and placed by the recipient into his or her bank checking account lose their exempt status."After a detailed discussion of Kentucky precedent and cases from several other jurisdictions, the Kentucky Supreme Court held:
" . . . . unless they provide clearly to the contrary, Kentucky's exemption statutes, including but not limited to KRS 342.180, extend protection to deposits in bank checking accounts so long as those deposits can be identified as or traced to payments of exempt funds."So, basically . . . no. Subject to the debtor's burden of proving the bank account funds originate from an exempt source, they may not be garnished to satisfy an ordinary debt. Debts for taxes and child support are a different story.
The court stated, "The right to a subsistence way of life is considered fundamental," and quoted from Kruger v. Wells Fargo Bank, 11 Cal.3d 352, 113 Cal.Rptr. 449, 521 P.2d 441 (1974).
"The legislative objective in providing unemployment compensation and disability benefits — to furnish the unemployed worker and his family with a stream of income to defray the cost of their subsistence — would probably fail if creditors could seize that income and apply it to past debts. Consequently the Legislature provided that unemployment and disability benefits cannot be subjected to attachment or execution."The court continued with,
"Our society's contemporary social programs exhibit a philosophy of relief for the distressed, the impoverished, and the victims of personal and financial catastrophes among us. The Workers' Compensation Act is simply one aspect of those social programs. Kentucky's exemption statutes are simply another necessary instrument in the overall scheme of social welfare programs. They are the teeth in the prosecution given certain deserving victims from their creditors."The laws applicable in Kentucky provide many protections for debtors in distress, but debtors must be aware of these legal rights and they must also take effective action to assert these rights when they are threatened.