Gothamist: “Backdoor Bailout For Banks”: Stimulus Checks Can Be Seized By Creditors And Banks

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By Sydney Pereira

The $1,200 stimulus checks that began hitting millions of Americans’ bank accounts on Wednesday could turn into a “backdoor bailout” for banks and creditors—which can currently seize the payments for individuals’ existing debt under a loophole the Treasury Department has not yet addressed.

The $2 trillion stimulus package, called the CARES Act, does not specifically exempt the payments from private debt collection. Such an exemption is under the Treasury Department’s authority, according to a letter two Senators sent to Treasury Secretary Steven Mnuchin last week. Without action from the department, the payments are “at risk of being seized by debt collectors,” Senators Sherrod Brown of Ohio and Josh Hawley of Missouri wrote.

“It really makes it seem like these stimulus payments are backdoor bailouts for banks and debt collectors,” Susan Shin, the legal director at the New Economy Project, told Gothamist. “It’s outrageous that these aren’t being protected by the federal government.”

Americans are already starting to see negative balances in their bank accounts offset with the federal cash—rather than provided for immediate use during the COVID-19 pandemic.

The veterans bank USAA is among those reportedly garnishing the payments. The family of a veteran with disabilities had $3,400 in payments taken from them offset debt, according to a report in the American Prospect. A representative from USAA told the family they “shouldn’t have gotten into debt in the first place,” according to the Prospect.

After outcry on Thursday afternoon, the USAA said it would suspend collection of the stimulus checks for 90 days for offsetting negative balances.

But Shin added state governors can also take their own action to fully exempt the payments from collection or any debt collection at all.

The New Economy Project has been calling on Governor Andrew Cuomo to put a moratorium on all private debt collection, which remains ongoing against people in the middle of a pandemic despite mass layoffs and sweeping business closures that have put New Yorkers out of work. Just in the past month, 1.2 million residents in New York State have filed for unemployment benefits.

“We believe that Governor Cuomo has the authority with his emergency powers to put a stop to debt collection in New York State during this crisis,” Shin said. “That would resolve that problem.”

A group of 13 state senators in New York have asked Cuomo to close the loophole another way: with an executive order labeling the payments as personal property, exempting them from being used to satisfy money judgments.

“Unfortunately, a lot of Americans owe money, and we don’t want a bank to take advantage of [an] already extremely difficult situation for New Yorkers by attempting to seize these checks for unpaid debt,” State Senator Brad Hoylman, who led the letter to Cuomo, told Gothamist. “It really would defeat the point of the stimulus payment which is to get Americans through this difficult time.”

“This is one solution that we’ve recommended but we’re open to any idea that the governor proposes,” Hoylman added.

A spokesperson for Cuomo pointed to a letter the governor sent to the Treasury Secretary urging him to exempt the checks from private debt collection by coding the payments as federal benefits, echoing the National Consumer Law Center.

“Coding the stimulus funds in this way would be a simple, powerful, and effective step,” Cuomo wrote over the weekend. “It will allow banks to automatically identify these payments as subject to the garnishment protections of state and federal law, and significantly reduce both administrative costs and litigation risk.”

25 state attorney generals led by New York Attorney General Tish James have also urged Mnuchin close the loophole. Even bank associations and a debt-buyer association have urged Mnuchin to ensure the payments are exempt from garnishment.

Others haven’t received their stimulus checks at all. There were widespread reports of error messages on the IRS website saying “payment status not available” due to an overloaded system or eligibility issues, according to the IRS. According to the Washington Post, millions who file taxes with companies like TurboTax and H&R Block haven’t received their payments because the IRS doesn’t have their direct deposit information.

Though Americans with debt should be cautious of how private creditors or banks may handle the stimulus payments once they’re received, Rep. Alexandria Ocasio-Cortez encouraged those seeking the payments to sign up here to get the check via direct deposit to speed up the process. Paper checks could take up to 20 weeks, she said in a statement.

The Treasury Department did not immediately respond to a request for comment.