Stimulus checks hit accounts this week, but your bank could withdraw it before you get the chance

Stimulus checks hit accounts this week, but your bank could withdraw it before you get the chance
President Donald Trump signs the coronavirus stimulus relief package as from left, Treasury Secretary Steven Mnuchin, Senate Majority Leader Mitch McConnell of Ky., House Minority Kevin McCarthy of Calif., and Vice President Mike Pence, look on. Direct deposited stimulus payments began this week.(Evan Vucci / AP)

Americans who need help paying rent or buying groceries amid the ongoing coronavirus crisis could see part or all of their U.S. government stimulus payments disappear as soon as the money hits their bank accounts.

Funds from the Coronavirus Aid, Relief, and Economic Security, or CARES, Act are being direct deposited across the country this week. But because most banks include a “set off” right in account agreements with customers, they can withdraw funds from accounts to satisfy unpaid debts.

That means individuals who have an overdrawn account or a delinquent loan could see that stimulus money, up to $1,200 depending on the individual’s 2019 income, used to satisfy those debts first if the funds are directly deposited into an account at the same institution where the debt is held.

“I would consider it a loophole in the [CARES Act] that could mean some people won’t be receiving the full amount that Congress wanted them to receive because they have outstanding debts with financial institutions into which the money will be deposited,” said Mary Spector, director of the Civil/Consumer Clinic at Southern Methodist University.

The Dallas Morning News contacted 16 banks based in North Texas. Only Comerica Bank said it is waiving the right to set off debts.

“Economic impact payments will not be subject to collection from Comerica Bank,” Carmen Branch, vice president of corporate communications for Comerica Bank, wrote in an email. “All rights of offset have been turned off to ensure full payments are provided to the payee.”

Beal Bank declined to comment, citing “internal privacy and confidentiality requirements with regard to business processes.”

Inwood Bank also declined to comment on the institution’s offset policy, but the bank’s online banking agreement states that if “any of your Accounts become overdrawn, under-funded or for any reason contain a negative balance, then we shall have the right of set-off against all of your Accounts and other property or deposit Accounts maintained with us.”

Thirteen other banks did not return requests for comment.

Ann Baddour, director of the Fair Financial Services Project for Texas Appleseed, said the payments are “supposed to be a stimulus for families, people who are struggling to pay rent, struggling to pay bills and to see that money siphoned off in this way is really troubling.”

“I don’t think there would have been the same political support if this were sold as a debt collection stimulus or a creditor stimulus,” Baddour said.

Congress exempted CARES Act payments from garnishment if the debt is owed to the federal government or a state government, but left the funds open to private debt collection.

Ronda Kent, chief disbursing officer with the Bureau of Fiscal Service at the Department of Treasury, said in an April 6 webinar for banking officials that financial institutions have asked for guidance on whether payments were subject to collections from the bank the funds were deposited in if the account holder owed money on an outstanding loan or other payment to the bank.

Twice during the webinar, Kent stated that “there’s nothing in the law that precludes that action,” but that bank personnel should consult their legal offices to see if individual banks had decided to suspend the right to set off debts.

Spector, who teaches consumer law at SMU, said there’s nothing in the CARES Act that protects the stimulus funds from banks seizing the money to offset unpaid debts.

“If there’s a check that’s going into the hands of the consumer, that check isn’t subject to offset until it hits the bank account,” she said. “The fact that it’s going by direct deposit to their bank account means once it hits, it’s fair game [for collection].”

Spector said if a taxpayer who is expecting their stimulus payment via direct deposit believes there are amounts owed to the financial institution into which the funds will be deposited, “it’s probably worthwhile for the taxpayer to get in touch with the financial institution to talk about how that should be handled.”

The Texas Supreme Court issued an order April 9 that delays new garnishment orders until May 8 in an effort to protect stimulus money. The order does not apply to accounts that were already being garnished, but the court did write that “the parties are strongly encouraged to reach an agreement on the garnishment, and courts are encouraged to aid and facilitate a quick adjudication.”

People who have already filed their 2019 taxes will not be able to change their direct deposit information if it was submitted when they filed, according to the IRS website. The website states that the only way for someone to update the direct deposit information from their 2018 return is to “file your 2019 taxes electronically as soon as possible.”

People who did not submit their direct deposit information for 2018 or 2019 can update their bank account information via the IRS website if their stimulus payment has yet to be issued.

The American Bankers Association, along with other financial groups, sent a letter April 15 to congressional leadership asking Congress to clarify that future coronavirus-related stimulus payments be exempted from “legally binding” garnishment orders.

“Unless Congress takes action to provide legal certainty, banks are legally required to provide garnishments to third-party creditors,” the letter states. “We urge Congress to provide this certainty to ensure that American families are receiving these benefits as intended.”

Baddour says that without further guidance from Congress or the Treasury Department, every financial institution can choose whether or not they use the stimulus payments to set off unpaid debts.

“The ideal fix would be for the Department of Treasury to create a uniform standard across the board exempting this money from garnishment, from any kind of offset or garnishment,” Baddour said. “Sadly when we leave things to piecemeal outcome, lots of people will probably end up losing that money.”