Protection of Federal Stimulus Payments from Creditors | Ballard Spahr LLP

In the federal government’s ongoing effort to revive the U.S. economy and help people harmed by the economic damage wrought by the coronavirus pandemic, an important detail has gone under-noticed:  the most recent set of federal stimulus payments to individuals are subject to garnishment by creditors.  And this fact is creating legal and operational challenges for the banking industry.

Unlike the federal stimulus payments provided to individuals and families pursuant to the Coronavirus Aid, Relief and Economic Security Act of 2020 (“CARES Act,” Pub. Law 116-136, 134 Stat. 281) and the Consolidated Appropriations Act of 2021 (Pub. Law 116-260), the federal stimulus payments provided under the American Rescue Plan Act of 2021 (Pub. Law 117-2) are not exempt from garnishment by creditors under federal law.  Within the banking industry, the three rounds of payments from the U.S. Treasury Department – known as “economic impact payments” – are commonly referred to as EIP1s, EIP2s, and EIP3s, respectively.  In the absence of Congressional action, however, several states have stepped in to provide garnishment protection for EIP3s through various directives or guidance.  In addition, some banks and financial institutions are voluntarily seeking to protect EIP3s either individually or through coalitions, although not required to do so by either federal or state law.

The American Rescue Plan Act, which was enacted on March 11, 2021, is a massive, $1.9 trillion COVID-19 economic stimulus law.  The legislation provides targeted economic relief, in part, through EIP3s in the amount of $1,400 for individuals earning up to $75,000 and $2,800 for couples earning up to $150,000. Those amounts phase out quickly, so that individuals earning between $75,001-$80,000 and couples earning between $150,001-$160,000 receive only partial EIP3s, and individuals who make more than $80,000 and couples making more than $160,000 do not receive any payments at all.

The reconciliation process used by Democrats to pass the American Rescue Plan bill in the Senate did not permit the inclusion of certain legislative text and, in the case of EIP3s, language protecting such payments from garnishment by creditors was not added.  To fix this issue following enactment of the American Rescue Plan Act of 2021, Senators Robert Menendez (D-NJ), Sherrod Brown (D-OH), Ron Wyden (D-OR) and Chris Van Hollen (D-MD) jointly introduced standalone legislation (S. 823) on March 17, 2021 that would protect EIP3s from garnishment by creditors.  (The language was purportedly identical to anti-garnishment language contained in the Consolidated Appropriations Act of 2021, although according to Congress.gov, the bill text is not yet available.)

On March 18, Senator Brown and Senator Wyden attempted to advance S. 823, the EIP3 garnishment protection bill, and called for its adoption by unanimous consent.  Unfortunately, Senator Pat Toomey (R-PA) objected, and his single objection rendered that bill effectively dead.  Although theoretically the federal bill could be resurrected, that seems highly unlikely, and the issue is now largely moot since the Treasury Department has already issued the majority of the EIP3s.  As a result, EIP3s are not currently protected from garnishment by creditors under federal law.

In light of Congress’ failure to provide protection for EIP3s from garnishment by creditors, several states have sought to protect EIP3s over the past few weeks.  At least one state, New York, has sought to protect EIP3s through legislation, whereas other states have issued executive orders, guidance and directives. Examples of executive actions include the following:

• On March 15, 2021, Maryland Governor Larry Hogan issued Executive Order 21-03-15-01 prohibiting garnishment of EIP3s.  The Executive Order provides that EIP3s are exempt from garnishment, and all financial institutions are ordered to consider these payments as protected…