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.

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.

Student Loan Wage Garnishment Hardship Exemption

Both 34 CFR §34.24 - §34.25 and 11 KAR 3:100 provide for a financial hardship exemption in administrative wage garnishments of, respectively, (1) defaulted student loans made directly by the U.S. Department of Education and, (2) defaulted student loans guaranteed by the Kentucky loan insurance program, the Kentucky Higher Education Assistance Authority.

Ordinary consumer student loans subject to judicial wage garnishments under Kentucky law do not have any similar hardship exemption expressly authorized by statute or judicial precedent, that I have found.

I have previously suggested (see: Inventing a Kentucky Wage Garnishment Hardship Exemption) that such an equitable hardship exemption might be implicit in Kentucky's judicial wage garnishment statute, KRS § 427.010(2).

All the world needs now is for some brave soul to put it to the test.

34 CFR § 34.24 - Claim of financial hardship by debtor subject to garnishment, provides in relevant part:

"(a) You [the student loan debtor] may object to a proposed garnishment on the ground that withholding the amount or at the rate stated in the notice of garnishment would cause financial hardship to you and your dependents. (See § 34.7)
"(b) . . .
"(c) . . .
"(d)

"(1) You bear the burden of proving a claim of financial hardship by a preponderance of the credible evidence.
"(2) You must prove by credible documentation —

"(i) The amount of the costs incurred by you, your spouse, and any dependents, for basic living expenses; and
"(ii) The income available from any source to meet those expenses.

"(e)

"(1) We consider your claim of financial hardship by comparing —

"(i) The amounts that you prove are being incurred for basic living expenses; against
"(ii) The amounts spent for basic living expenses by families of the same size and similar income to yours.

"(2) We regard the standards published by the Internal Revenue Service under 26 U.S.C. 7122(c)(2) (the ‘‘National Standards’’) as establishing the average amounts spent for basic living expenses for families of the same size as, and with family incomes comparable to, your family.
"(3) We accept as reasonable the amount that you prove you incur for a type of basic living expense to the extent that the amount does not exceed the amount spent for that expense by families of the same size and similar income according to the National Standards.
"(4) If you claim for any basic living expense an amount that exceeds the amount in the National Standards, you must prove that the amount you claim is reasonable and necessary. "

The corresponding part of the Kentucky Administrative Regulation, 11 KAR 3:100(6), starts off simple and shifts from the general to the specific, and then . . .

"(a) If the debtor asserts as a defense a claim that withholding of his disposable pay would constitute an extreme financial hardship, the debtor shall submit documentation of all available resources and actual expenses and shall have the burden of demonstrating the necessity of actual expenses.
" (b) The hearing officer shall compare the debtor's available resources and the necessary expenses and current debt obligations of the debtor and debtor's dependents. The hearing officer shall determine that extreme financial hardship exists if the debtor currently is not able to provide at least minimal subsistence for the debtor and debtor's dependents that could be claimed on a federal income tax return. The hearing officer shall consider as available resources of the debtor income of the debtor, the debtor's spouse, and debtor's dependents from all sources, including nontaxable income and government benefits, expenses paid on behalf of the debtor by another person, and the cash value of any current liquid assets, such as bank accounts and investments. The hearing officer shall consider the claim of extreme financial hardship in accordance with the presumptions established in this paragraph.

"1. Withholding of an amount of disposable pay shall constitute an extreme financial hardship if:

"a. The debtor resides in the District of Columbia or a state other than Alaska or Hawaii and the debtor's available resources do not exceed the applicable poverty guideline, multiplied by 125 percent, based on the debtor's family size:"

 . . . . and, then it gets way too complex to easily summarize or excerpt You'll just have to read it for yourself. This much of it indicates that one living below 125% of the poverty level cannot have his or her wages garnished by a state administrative proceeding to satisfy a student loan debt, upon proper application and proof.

Student Loan Wage Garnishments

There are three general categories of student loans.

1. Direct loans from the U. S. Department of Education;
2. Loans guaranteed by a state loan insurance program, and;
3. Ordinary consumer loans.

Each of these three 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 depends 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  Debt Collection Improvement Act of 1996 and they are subject to the procedures contained within 34 Code of Federal Regulations (CFR) Part 34.

Administrative wage garnishments to collect student loans guaranteed by a state loan insurance program are authorized by the Higher Education Act and corresponding State statutes and regulations. The administrative wage garnishment procedures used by the Kentucky Higher Education Assistance Authority are contained in 11 Kentucky Administrative Regulation (KAR) 3:100.

Wage and non-wage garnishments to collect ordinary consumer student loans are subject the 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 it is.

Debtor Grounds for a Hearing In an Administrative Wage Garnishment

The federal Debt Collection Improvement Act of 1996 provides administrative wage garnishments for the collection of wide array of debts owed to the federal government. Debtors are entitled to request and obtain a hearing to contest such a wage garnishment. The grounds a debtor may assert are as follows.

(1) Existence, validity, past-due status or amount of the debt: Objection on grounds that –

• The debt was previously paid or settled in full
• The debtor is in compliance with a valid repayment agreement
• The amount owed on the debt is incorrectly stated because not all payments had been credited
• The debtor has a legal defense as to liability for the debt under Federal or State law

(2) Enforceability of the debt through  Administrative Wage Garnishment (AWG):

• The debt was discharged or is currently in active bankruptcy
• The debt is unenforceable by AWG due to involuntarily separation from previous employment and debtor currently employed for less than 12 months

(3) Financial hardship: Garnishment of fifteen  percent (15%) of the debtor’s disposable pay will create a financial hardship on the debtor and his or her dependents .