To offset or not to offset? Handling the latest round of stimulus payments

With the passage of HR 133, credit unions will see (and most already are seeing) a rash of new deposits in their members’ accounts from the U.S. Treasury Department. The question is, are these protected funds?

The original CARES Act Economic Impact Payments (EIP) were not subject to administrative reduction or offset for past federal or state debts but did not offer any protections from garnishment by private parties or debt collectors. This resulted in some states (Texas, for example) issuing statewide orders that effectively prevented creditors from using garnishment (or other similar methods) to seize these funds.

Through the efforts of banking lobbyists, the recent stimulus payments are completely exempt from creditor garnishment. Garnishment is defined by HR 133 broadly and includes:

• Garnishment
• Levy
• Attachment
• Or other legal process

This definition effectively applies the same protections to these payments as other protected funds, such as Social Security and VA retirement payments.

What does that mean for our rights of offset?

When we talk about “offsetting” at a credit union, we’re summarizing our rights both by contract and at law. Those are the statutory lien on shares, pledge of shares (through contract), cross-collateralization, and the common law right of setoff. These rights provide us with the ability to seize funds on deposit to satisfy debts.

Due to its more informal nature, credit unions do not see this “offset” as a legal process, but some courts (such as 10th Circuit in Tom v. American Credit Union) have taken a much broader view that “other legal process” does include our offset rights. While this is not the prevailing law in all Cornerstone states (except Oklahoma, which is in the 10th Circuit), future litigation might adopt the same view. Therefore, protected payments, including EIP, should not be seized through offset to satisfy past-due or charged-off loans.

The only exception to this rule is if the debt was incurred through the use of the deposit account in which EIP funds are deposited, such as covering an overdraft balance or fee. In this case, EIP funds may be used to satisfy this negative balance. Rules for other kinds of protected funds permit the application of funds in this way and would extend to these EIP funds as well. This use does not extend to accounts that were previously charged off, and such accounts may not be reopened to receive deposits for purposes of offset.

We understand that these funds may represent the first new positive balances that many of our members’ accounts have had during the past year, and the temptation is great to grab those proceeds quickly. Any such action, although unadvisable, should be reviewed by your preferred counsel, as the purpose of these funds is for people to meet basic living needs. Grabbing these funds may negatively impact the reputation of the industry.