Debtor's lament - accounts frozen by garnishment

When an ordinary creditor garnishes a debtor's bank account, the bank responds by freezing the debtor's access to the funds until the garnishment process is complete. I suppose the bank will continue to accept deposits into the account, but withdrawals and automatic bill payments stop. The debtor's outstanding checks begin to bounce as they are presented to the bank for payment. This happens even if all of the debtor's cash in a deposit account are exempt from execution by law and are immune from seizure. Twentieth Century garnishment procedures require the debtor to affirmatively act to claim and prove the exemption and persuade a judge to release the garnishment, restraint, freeze or whatever they call it in your local jurisdiction. The process can easily take 30 days or more. From a debtor's point of view, it's like adding injury to insult. It is an very iffy proposition that every debtor has the wits and resources to take the steps necessary to protect his or her legal rights.

In the last few years the U.S. Treasury Department has developed regulations to mitigate this debtor problem, at least with respect to federal benefit payments that are immune from seizure by ordinary creditors.  Veteran benefit payments and Social Security benefits are prime examples. These federal benefits, among others, are practically impervious to the claims of ordinary creditors. The U.S. Congress and the U.S. Supreme Court have said so, repeatedly. But, prior to the age of digital banking, who knew where money came from? 

With most federal benefit payments being made by direct deposit these days, the source of the deposits are digitally encoded and the financial institution 'knows' if funds in an account are exempt. The recently finalized Treasury regulations ( 31 C. F. R. 212) require banks and other financial institutions to make two months of exempt payments available to the debtor during the garnishment process while freezing any surplus funds.

This does not change the scope of the debtor's exemption. If the debtor has more than two months worth of exempt benefit payment on deposit, the debtor must still follow ordinary garnishment procedures to claim the full exemption. In the meantime, the debtor is not frozen out of exempt cash needed for day-to-day living expenses.

Will this new system work to perfection and without error? Probably not.

But, a word of caution to debtors. It is best to leave exempt federal benefit direct deposits in the same account into which they were originally deposited. If any direct deposited benefit funds are transferred by the debtor to a different account, as for example from a checking account to a savings account, the bank's ability to easily identify the exempt funds may be forfeited. Again, this does not change the availability of the exemption, but it may result in more of the debtor's funds being frozen as application is made to the court and the debtor proves the exemption.

Garnishment Exemptions Available to Kentucky Residents

Certain property is exempt from seizure by general creditors. There are several categories of exemptions available to Kentucky debtors. Different exemptions apply to non-bankruptcy debtors and debtors in the process of seeking bankruptcy protection. Certain exemptions are provided by Kentucky law and others are provided by federal law. Different exemptions apply to tax debts and non-tax debts. Most Kentucky non-bankruptcy non-tax debt exemptions otherwise available do not provide protection for claims of child support obligations.  Many federal exemptions do not apply to debts to the federal government.

The following is a rough outline of available exemptions under Kentucky and federal law. As with all things legal, the devil is in the details and the opportunity for serious complications is nearly endless.

Kentucky Non-Bankruptcy Exemptions

This is a fairly comprehensive list of Kentucky statutory non-bankruptcy exemptions. A few, like exemptions for state bonuses paid to World War I veterans, have been omitted. Additional specific federal exemptions are listed below.

• Alimony support or separate maintenance
• An award under a crime victim's reparation law;
• Payment received for wrongful death of an individual the debtor was a dependent to the extent reasonably necessary for support of debtor and debtor's dependents;
• Up to $7,500 paid for personal injury, with qualifications;
• Compensation for loss of future earnings to the extent reasonably necessary for support and maintenance;
• Payments received from an exempt pension;
• Individual retirement accounts, and other types of retirement plans, with some exceptions;
• Household furnishings, jewelry and personal clothing not to exceed $3,000 in value;
• Tools, equipment and livestock of a person engaged in farming, not exceeding $3,000;
• One motor vehicle and its necessary accessories, not exceeding in the aggregate $2,500;
• Professionally prescribed health aids for the debtor, or a dependent of the debtor;
• The tools, not exceeding $300 in value, of any individual debtor necessary in his trade;
• The professional library and office equipment of a minister, attorney, physician, surgeon, chiropractor, veterinarian, or dentist, necessary in the practice of such profession, and not exceeding $1,000 in value;
• Homestead or burial plot not to exceed $5,000 in value, total;
• Certain life insurance benefits;
• Certain police or firefighter’s pension fund benefits;
• Worker’s compensation benefits;
• Certain retirement annuity benefits for public school and university teachers and employees;
• Participation in Kentucky Educational Savings Plan Trust;
• Wages of work-release prisoners, with exceptions;

KRS 427.045 - Exemptions not applicable to claims for child support, provides:

“The exemptions provided in KRS 342.180 and KRS 427.010 to 427.040 shall not apply for executions, attachments, or garnishments, issued for the collection of maintenance of minor children.”

Federal Non-Bankruptcy Exemptions

Most of the following exemptions are not available as against child support or tax collections. Many are nevertheless subject to administrative offset for the collection of non-tax debts to the United States.

• Social Security Benefits - Old Age, Survivors and Disability Benefits
• Supplemental Security Income (SSI) Benefits
• Veterans’ Benefits
• Civil Service and Federal Retirement and Disability Benefits
• CIA Retirement benefits
• Crop insurance
• Military Annuities and Survivors’ Benefits
• Student Assistance - Federal Work Study program benefits
• Railroad Retirement Benefits
• Merchant Seamen Wages
• Longshoremen’s and Harbor Workers’ Death and Disability Benefits
• Foreign Service Retirement and Disability Benefits

Exempt Funds after Deposit into Bank Account

Question: Can a general creditor successfully garnish exempt payments once the money has been deposited into a debtor’s bank account?

Answer: Maybe yes and maybe no. It depends.

In Matthews v. Lewis, Ky., 617 S.W.2d 43 (1981), the Kentucky Supreme Court answered the question for one type of exempt payment, A bank account containing worker’s compensation payments continue to be exempt from execution, attachment and garnishment. The court wrote:

“We hold that 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.”

Although the Matthews case should provide debtors considerable encouragement with similar statutory exemptions, each statutory exemption is subject to the proviso the statute may, “clearly provide to the contrary.”

For example, Kentucky’s Transitional Assistance Program (KTAP) provides in KRS 205.220(3):

"Public assistance shall not be assignable and shall be exempt from levy or execution. Furthermore, no assignment, pledge or encumbrance of any right to benefits due or payable under this chapter shall be valid. Public assistance benefits, as long as they are not mingled with other funds of the recipient, shall be exempt from any remedy for the collection of all debts, liens and encumbrances. No waiver of any exemption provided for in this subsection shall be valid.” [emphasis added]

Matthews v. Lewis, did not impose the no-mingling of funds requirement generally. This specific statute added the requirement.

Additionally, there is a potential for complications depending upon the type of account into which the exempt funds are deposited. There is a distinction between money that is immediately available to the debtor for current living expenses and money that has been transformed into an ‘investment.’ There are many different types of accounts offered by banks and financial institutions that are clearly long term investment accounts. The continued exempt status of funds in these accounts would be disqualified. This, as lawyers like to say, is an “interesting question.”

Wage Exemptions Are Not Exemptions

The federal Consumer Credit Protection Act (CCPA) limits the amount of a debtor’s wages that can be garnished. Kentucky has enacted statutory law virtually identical to the CCPA wage garnishment limits in KRS 427.010(2). Although this has been lumped in KRS Chapter 427 with other genuine exemption provisions, for codification purposes, this accident of proximity does not really mean much.

This statutory limit on wage garnishments is not an exemption and it does not protect wages after they have been paid to the employee. If the wages actually paid to an employee are deposited into a bank account, they are subject to a bank garnishment, in Kentucky. See: Brown v. Commonwealth of Kentucky, 40 S.W.3d 873  (Ky. App. 1999)

See also: Notes on Kentucky's exemption laws.

Kentucky Garnishment of Jointly Owned Bank Accounts

It often happens that a creditor will garnish a debtor’s bank account, but there are more individuals named as account owners than just the one debtor. People have a multitude of reasons for jointly owned bank accounts, and they may never have thought about the possibility their individual deposits to an account might be subject to the debts of a another named account co-owner.

KRS 391.310(1) provides in part as follows:

“A joint account belongs, during the lifetime of all parties, to the parties in proportion to the net contributions by each to the sums on deposit, unless there is clear and convincing evidence of a different intent.”

A party’s “net contribution” to the account is defined by KRS 391.300(6) as the sum of all deposits thereto made by or for him, less all withdrawals made by or for him which have not been paid to or applied to the use of any other party, plus a pro rata share of any interest or dividends included in the current balance. These statutory provisions are “relevant only to controversies between these persons and their creditors and other successors,” KRS 391.305. Each of an account’s co-owners may be authorized full access and right to withdraw all of the funds in an account, even if that is more than their respective individual contribution of fund into the account, but in Kentucky the mere right to withdraw all the funds from an account does not establish ‘ownership’ of all the funds.

For example, a joint account is established for a child’s education with the intent that the child is the owner of all the funds in the account even though many contributions into the account are made by others. If contributions to the fund are intended as gifts to the child,  “clear and convincing” documentation should be created to establish that intent to safeguard the account funds from the other’s creditors, KRS 391.310(1), supra.

Ownership of joint bank accounts is presumed by statute to depend upon who contributed the funds to the account, subject to proof of a different intention. But, with bank account judicial garnishments, Kentucky courts have held that a party to a joint account is initially presumed to own the entire joint account for procedural purposes. The debtor or other account co-owners must claim and prove their respective contributions to the account to overcome that presumption, or prove an intention that the non-contributor has a greater ownership interest than their relative contributions would indicate. See Brown v Commonwealth of Kentucky, 40 S.W.3d 873 (Ky. App. 1999)

Brown, supra, stated in passing the best procedural practice would be for the non-debtor joint owner of the account to intervene as an interested party pursuant to Civil Rule 24.01 and assert his or her ownership rights directly.

Distraint for Rent or Garnishment - Kentucky Law

This is a very long explanation of not very much.

Residential landlord and tenant law is complicated in Kentucky because the Uniform  Landlord and Tenant Act (URLTA), as enacted  by the Kentucky legislature, applies to residential renters in some parts of the Commonwealth, but not in other parts. In Kentucky, URLTA is available as a local government option, to be enacted as local governments see fit, or not. Consequently, whether the provisions apply to any particular residential tenancy depends upon the geographic location of the residence. Generally speaking, the larger urban centers in Kentucky, such as Louisville and Lexington, have locally adopted URLTA but the more rural areas have not.

The URLTA provisions do not apply to commercial and agricultural renters, wherever they may be located in the Commonwealth. URLTA applies only to residential tenancies in areas that have adopted that law locally.

Kentucky landlords have a statutory lien for unpaid rent on the tenant’s personal property, which may be recovered by attachment or by action, KRS 383.010, et seq., even if the rent debtor’s property is in the possession of a third party. KRS 383.020(1) states, “A distress warrant or attachment for rent shall bind, and may be levied upon, any personal property of the original tenant found in the county . . . .” This language indicates the subject personal property of the rent debtor does not necessarily have to be found on the leased premises. This landlord remedy is traditionally known as distraint for rent. The URLTA, on the other hand, abolishes distraint for rent, KRS 383.680, for residential tenants, in those areas where URLTA applies.

Seizing a person’s personal property in the hands of a third party to satisfy a debt for rent has the same look and feel as does a non-wage garnishment, but it has an entirely different statutory foundation.

The Complexity of Student Loans - Kentucky Edition

There are two general categories of student loans.

1. Government originated or guaranteed student loans, and;
2. Non-government originated uninsured student loans.

Both types of student loans may ultimately be collected by garnishment upon default. However, the legal authority and the procedures applicable in the event a garnishment is pursued depend upon the source and the type of the loan.

Administrative wage garnishments to collect direct student loans from the federal government are authorized by the federal Debt Collection Improvement Act of 1996. Most student loans from the federal government originate from the Department of Education. These are subject to the procedures contained within 34 Code of Federal Regulations (CFR) Part 34.

The federal Department of Health and Human Services helps fund specialized loan programs for medical and nursing students. These health profession student loan funds are established and administered by medical or nursing schools which do not have the legal authority for non-judicial administrative garnishment debt collections. School administered health profession student loan debts are collected through normal judicial procedures. See: 42 CFR Part 57, Subparts C & D. Although these school based programs are regulated and partially funded with federal money, the loans are administered and collected by non-government entities.

Administrative wage garnishments to collect student loans guaranteed by a state loan insurance program are authorized by the federal Higher Education Act and corresponding state statutes and regulations. The administrative wage garnishment procedures used by the Kentucky Higher Education Assistance Authority (KHEAA) are contained in Kentucky Administrative Regulation 11 KAR 3:100. These guaranteed student loans are made and administered by private lenders. Initial collection of delinquent guaranteed loans is undertaken by the private lenders but ultimately, defaulted loans are transferred to KHEAA which pursues final collection methods, including administrative wage garnishment.

The Kentucky Higher Education Student Loan Corporation (KHESLC) was created by Kentucky Revised Statute 164A in 1978 as an independent public corporation and political subdivision of the Commonwealth. KRS 164A.240(2)A3 specifically authorizes KHESLC to establish and use administrative garnishment to collect defaulted student loans.

The KHESLC and the KHEAA share a common board of directors, executive director, staff and office space and by statute, KRS 164A.050(12). They also provide technical, clerical and administrative assistance to each other. In addition to its other functions, KHESLC makes direct insured student loans. Presumably, the direct student loans made by KHESLC are insured by KHEAA.

The complex inner workings of these two public Kentucky corporations are unimportant to a student loan debtor. For all practical purposes, it seems, KRS 164A.050(13), a direct insured student loan from KHESLC is collected the same as an insured student loan from a private lender.

There are countless non-government sources for uninsured student loans, ranging from large financial institutions to small loan funds established by local civic or non-profit organizations. These are ordinary private loans that are recovered through standard debt collection and judicial processes.

Wage and non-wage garnishments to collect ordinary uninsured student loans from private lenders are subject to the same statutory law, procedural rules and appellate opinions as are all other judicial garnishments.

It is important to know which type of student loan is being collected, who currently owns the loan and who is collecting a delinquency.  However complicated the abstract legal framework may appear, it is actually fairly simple when compared to how the student loan business is implemented in actual practice. For example, the Kentucky Higher Education Student Loan Corporation, a public corporation, may administer loans originated by independent private non-profit corporations and then subcontract collections to a private debt collector. The loan account may bounce around among different organizations depending upon the phase of loan repayment, delinquency or default.  Selling loans in the secondary market is another common practice among lenders, possibly including buy-back provisions on default, so the financial institution or organization a borrower sends his or her payments to and ownership of the debt may change during the life of the loan. The ownership, servicing and collection of student loans may be divided among different organization and all may shift over time.

It can become very confusing for a debtor. Keep good records and keep your lender updated on your mailing address so that you always receive important notices, which you faithfully collect and retain in a file.