WASHINGTON (AP) -- Bill collectors are exploiting a legal loophole to seize Social Security and veterans' benefits even though federal law is supposed to protect the payments from creditors.
Lawmakers from both parties who have been pressing the Treasury Department for years to close the loophole with new regulations are growing impatient. The Obama administration is now promising action but has offered no timetable for developing the new rules.
Federal law has long protected Social Security and veterans' benefits from most creditors, with a few exceptions for child support, alimony, unpaid federal taxes and debts to other federal agencies. But creditors have been seizing the payments anyway by getting court orders to freeze and garnish bank accounts that receive the benefits through direct deposit.
Activists say the issue has festered for years, but has intensified as more recipients get their benefits deposited directly into bank accounts.
Many people who receive Social Security or veterans benefits can't afford to have their bank accounts frozen for even a short period of time, said Margot Saunders of the National Consumer Law Center. It's hard to hire a lawyer to get your money back when all your resources are frozen, she said.
"They take all your money, and they take it illegally," Saunders said. "But when you live on $700 or $800 a month and have all that money garnished, there's very little recourse."
During a 12-month period from 2006-07, an estimated $178 million was garnished from bank accounts that included a mixture of Social Security benefits and other deposits, according to the Social Security Administration's inspector general.
"Some banks are doing the right thing to protect their customers by denying creditors' requests to freeze and garnish accounts with Social Security funds, but too many banks are not," Sen. Herb Kohl, D-Wisc., chairman of the Senate Special Committee on Aging, said this week.
"We need our banking regulatory agencies to recognize this widespread problem and start enforcing the law," he said.
Kohl and other lawmakers have introduced a bill that would stop further promotion of the direct deposit programs for Social Security and veterans' benefits until the Treasury Department issues rules to protect the benefits from creditors. More than 80 percent of the 51 million Social Security recipients get their payments through direct deposit.
Assistant Treasury Secretary Michael Barr was asked by lawmakers to commit to new regulations last month, before he was confirmed by the Senate.
"I am fully committed to ensuring that federal anti-garnishment statutes are given full force and effect," Barr said in a written response to questions from Kohl. But he said he also wanted to do it "without imposing burdens or shifting liabilities to financial institutions." A Treasury official said this week the department has already reached policy agreements with the agencies that issue protected benefits. The next step is to write formal rules, said the official, who spoke on condition of anonymity because she was not authorized to publicly discuss the rulemaking process.
In a related issue, the California Supreme Court ruled Monday that Bank of America could recoup overdrafts and insufficient funds fees from accounts that include Social Security payments. The court said it based its ruling on state law.
Bankers say they are often confronted with court orders to garnish accounts that include deposits from multiple sources -- including money that is not protected from creditors. They often respond by freezing the account while the bank customer and the creditor resolve the issue, said Mark Tenhundfeld, a senior vice president of the American Bankers Association.
"The banks want to do the right thing," Tenhundfeld said. "But we can't tell which of the two parties are entitled to the money." He said one possible solution would be a rule exempting a certain amount of money from being frozen, so bank customers would have access to at least some money while the dispute is resolved.
"There are instances where people experience real hardships," Tenhundfeld said.