Dear Debt Adviser: I may have to retire soon for health reasons. If I default on my unsecured credit card debt, can my Social Security benefits or pension be garnished? — David
Dear David: Sorry to hear about your health issues. And I’m equally sorry to hear you haven’t saved enough money to pay your debts. Given your forced retirement and debt issue, you’ll probably have a budget issue after leaving work.
Retirement can be comfortable if you have health and wealth. With neither, you must be cautious.
Should you default on your unsecured credit card debt, collectors’ actions will depend in part on how much debt you are carrying on your credit cards and to whom you owe the money.
If you owe a large amount, say more than $5,000, your creditors likely will pursue collection aggressively by going after your assets. That could mean garnishment of wages or bank accounts (if such action is allowed in your state) or property liens.
Smaller amounts may not be worth an individual creditor’s time but may be packaged and resold to companies specializing in debt collections. Depending on who you’re in hock to or who buys the debt, the collection action could become harassing and just plain nasty. To prevent that, I suggest that, at a minimum, you communicate with your creditors before you default to see if you can work out a repayment plan or settlement arrangement.
Regarding your Social Security payments, the Department of the Treasury has some recent regulations that require banks to protect from garnishment federal benefit payments that are direct-deposited into a bank account. (Unless it’s the government that you owe. In that case, you are up the proverbial creek.)
In general, when a bank receives a garnishment order, it must review the account and protect from garnishment any federal benefits directly deposited into the account during the previous two months. So, for example, if you receive Social Security benefits of $2,000 per month through direct deposit, any amount of $4,000 or less in your account at the time of the garnishment order would be safe. Any money over your two-month benefit amount would not be protected.
Before this rule, the banks could just freeze your entire account until you proved that some of the money in it was from Social Security.
The bank could still freeze your entire account if the federal benefits in there were deposited by check, no matter how recently. But Social Security no longer writes checks; recipients are required to receive benefits by direct deposit or debit card.
Your other pension benefits would be protected only if they’re federal pension benefits — from the Federal Employees Retirement System or the Veterans Affairs pension program, for example.
If you are unable to work with your creditors to settle your debt or secure an affordable repayment plan, I suggest you see a nonprofit credit-counseling agency. If you strike out there, then go visit an attorney to find out your legal options. A good bankruptcy attorney can advise you on the best way to avoid garnishment or other collection proceedings.
Sadly, your situation illustrates that we don’t always get to choose how long we will work before retirement. It also demonstrates the real value of a good financial plan and a competent financial adviser.