Private debt collectors can legally seize $1,400 federal stimulus payments from people who have unpaid credit card bills or outstanding medical expenses.
Companies that are owed money have the ability to seek a court order to garnish the bank accounts of check recipients who have had their checks direct deposited.
If the judge signs off, a bank becomes legally required to turn over the money.
Democratic lawmakers are now scrambling to close the collection loophole.
Oregon Sen. Ron Wyden plans to introduce legislation to protect stimulus payments from this form of backdoor requital, CNN reports.
“We really wish this could have passed before the money started going out,” said Lauren Saunders, associate director of the National Consumer Law Center. “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.”
The $600 checks that went out in the second round of payments under former President Donald Trump were shielded from creditors, but this time around Senate procedural rules that Democrats used to pass the $1.9 trillion bill prevented the protections from being included, CNN reports.
The safeguard was also missing from the first coronavirus stimulus bill under Trump, known as the CARES Act, which provided $1,200 payments to struggling Americans.
Advocacy groups like the National Consumer Law Center and the American Bankers Association, are pushing lawmakers to address the issue.
“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 groups wrote in a letter sent to Congressional leaders, according to CNN.
About 85% of American households are set to receive the third round of payments through direct deposit, paper checks or prepaid debit cards by mail, fulfilling a major campaign promise by President Joe Biden. The direct deposits began last weekend and will continue over the coming weeks.
Families are also expecting to receive an extra $1,400 per dependent, meaning a couple earning less than $150,000 with two children could qualify for up to $5,600
The law does protect stimulus payments from other outstanding federal debts, like student loan or taxes.
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