IRS: Credit Unions Are Free to Seize Stimulus Payments

Despite efforts by financial industry and consumer groups to reverse the policy, the third round of Economic Impact Payments to individuals may be seized by states and creditors, a Biden Administration official has told senators.

“After a payment in the third round of EIPs is deposited into an individual’s bank account, federal law does not protect that amount from state offsets or from garnishment by creditors,” Aruna Kalyanam, the Treasury Department’s deputy assistant secretary for tax and budget in the Office of Legislative Affairs, wrote in a letter to Sens. Joe Manchin (D-W.V.) and Maggie Hassan (D-N.H.).

She continued, “Therefore, to the extent permitted by applicable state and local law, amounts paid in the third round of EIPs may be subject to garnishment by state governments, local governments, or private creditors, as well as pursuant to a court order.” She said that the IRS plans to make that policy clear in its “Frequently Asked Questions” section on its website.

In the first round of stimulus payments, creditors were able to garnish funds deposited into someone’s bank account. In the second round of payments, Congress made it clear that the stimulus payments could not be seized.

Congress did not include that prohibition in the third round of payments and a diverse group of organizations that included the Credit Union National Association and the National Association of Federally-Insured Credit Unions wrote a letter to congressional leaders asking that the prohibition be adopted for the third payments.

“The economic impact payments are intended to help families purchase food and other necessities to make ends meet,” the groups wrote. They pointed out that depository institutions are required to comply with court-ordered garnishments.

National Credit Union Administration Board Chairman Todd Harper urged credit unions not to garnish the payments when they have a choice. “But a small number may [choose] a different course,” he said, at a March town hall meeting sponsored by the Maine Credit Union League. “Like a pickpocket on the subway, they may grab the stimulus money meant for daily living expenses from their members.” He said that credit unions should consider the reputational risk they face by seizing the payments when they do not have to do so

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