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Debt collectors can seize the new stimulus checks. Lawmakers are trying to fix that

Recipients with unpaid credit card or medical bills for which a company has obtained a judgment against the debtor could see the fresh infusion taken from their bank accounts, potentially preventing those in need from getting the emergency cash.

Sen. Ron Wyden, a Democrat from Oregon, plans to introduce a fix that would shield the payments from garnishment as early this week, according to a spokeswoman.

But for now, it’s possible collectors could seize the money, worth up to $1,400 per person, that the federal government is directly depositing into people’s bank accounts.

“We really wish this could have passed before the money started going out. The protection would have been far more effective if the payment was coded in a way so that banks would automatically know to protect the money,” said National Consumer Law Center associate director Lauren Saunders.

Why the change

Lawmakers shielded the $600 payments that were approved as part of the December stimulus, but the latest Covid relief bill did not include that protection because of the procedural rules Democrats used to push the bill through the Senate, where no Republicans signed on.

The relief bill passed in last March, known as the CARES Act, also failed to include language protecting the first round of stimulus payments, worth up to $1,200, from private debt collectors. A standalone Senate bill that would have shielded the payments was passed by unanimous consent a few months later but was not taken up by the House.

A coalition of advocacy groups, ranging from the National Consumer Law Center to the American Bankers Association, are urging lawmakers to make the fix.

“Otherwise, the families that most need this money — those struggling with debt and whose entire bank accounts may be frozen by garnishment orders — will be not be able to access their funds,” the group wrote in a letter sent to Congressional leaders.

If the creditor has sued over the debt and there’s a court order in place for garnishment, a bank must turn over the money by law, unless Wyden’s proposed bill passes.

Who’s eligible for a $1,400 check?

The third round of payments is expected to reach about 85% of families, according to the White House. Those whose bank information is on file with the Internal Revenue Service will likely get the money first, because it will be directly deposited into their accounts. Others may receive paper checks or prepaid debit cards in the mail.

Direct deposits started going out this weekend and additional batches of payments will go out over the coming weeks.

Families will receive an additional $1,400 per dependent, so a couple with two children could receive up to $5,600. Unlike prior rounds, families will now receive the additional money for adult dependents over the age of 17.

The full amount goes to individuals earning less than $75,000 of adjusted gross income, heads of households (like single parents) earning less than $112,500 and married couples earning less than $150,000. But then the payments gradually phase out as income goes up.

Lawmakers narrowed the scope of the payments this time so that not everyone who received a previous check will be sent one now. It cuts off individuals who earn at least $80,000 a year of adjusted gross income, heads of households who earn at least $120,000 and married couples who earn at least $160,000 — regardless of how many children they have.

Payments are shielded from other debts

The law protects the stimulus payments from garnishment for other outstanding federal debts, like student loan or tax debt.

For the $1,200 payments authorized by the CARES Act last year, the payment was protected form all debts except delinquent child support. Congress expanded the exclusion for the second round of payments, worth up to $600, making sure the money would not be offset even for owed child support.
Some struggling Americans aren't getting the stimulus payment they were promised. Here's why
But there’s another hurdle for people who were eligible but missed out on getting the earlier payments. An estimated 8 million households that didn’t get the money sent directly to them, most commonly because the IRS didn’t have their correct information on file. Very low-income people are not normally required to file taxes.

Those people are allowed to claim the payment as a credit on their 2020 tax return. But the none of the three Covid relief bills shield those tax credits from back debts — even federal ones.

An IRS spokesman told CNN last week that the agency is reviewing what might be possible to address the problem. Yet people who have filed their 2020 tax returns could already have lost out on the cash and won’t have any way to get it back.

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