Hundreds in Philly could lose coronavirus relief money because stimulus checks aren’t safe from debt collectors

Hundreds of Philadelphians may be locked out of their bank accounts and could lose their federal coronavirus stimulus checks to creditors and debt collectors, cutting them off from funds they may need to pay rent and buy groceries during the pandemic.

In the three months before the coronavirus crisis closed courthouses, the city’s Municipal Court judges issued more than 400 so-called garnishment orders, which allow people and businesses to collect their winnings after succeeding in civil cases, according to an estimate from Community Legal Services (CLS), a nonprofit law firm that represents low-income residents.

The bulk of the garnishment orders come from cases brought by debt collectors and creditors, who sue consumers when they fall behind on credit card payments and loans, said CLS attorney Laura Smith. Sheriffs often serve the orders on banks to freeze consumers’ accounts, preventing them from spending or withdrawing money.

That means hundreds of Philadelphians may have their funds frozen at a time when millions of Americans are out of work. And they could be blocked from getting federal stimulus checks that weren’t protected from debt collectors when Congress hastily put together the CARES Act, the $2.2 trillion coronavirus relief package. The snatching of relief payments — up to $1,200 for individuals and $2,400 for married couples, plus $500 per child — has sparked widespread criticism, with lawmakers, consumer advocates, and banks calling on federal officials to resolve the issue.

“It’s supposed to be a lifeline to people that are in crisis to buy food and medicine and pay their rent and utilities," Smith said. “But unfortunately, there’s nothing in the law that clearly protects the money from garnishment.”

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Garnishment is an arrangement in which creditors get a court order to force banks to freeze the accounts of people with judgments against them. The banks, acting on behalf of debt collectors, are allowed to take money from these residents’ accounts toward their outstanding debt repayment.

In the 90 days before March 20, there were 413 valid garnishment orders in Philadelphia Municipal Court’s small claims division, which handles claims of less than $12,000, Smith said. The orders, also known as writs of execution, must be served on a bank within 90 days once issued.

There were more garnishment orders in Philadelphia Common Pleas Court, but the legal service couldn’t analyze exactly how many.

In letters dated March 20 and April 16, Smith urged the Philadelphia Common Pleas and Municipal Courts to halt existing garnishment orders so vulnerable families could access their bank accounts during the crisis.

On Wednesday, the president judges of Philadelphia Common Pleas and Municipal Courts ordered that garnishment orders can no longer be issued or served until further notice. But Philadelphians whose bank accounts are already frozen because of existing orders must file an emergency petition.

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A spokesperson for the courts said they cannot exempt federal stimulus funds from garnishment, saying that such legal authority lies with the legislative and executive branches.

“The court is sympathetic with the problems that Philadelphians may face from having their bank accounts frozen,” the spokesperson said in a statement. “For that reason, the court has a procedure for any individual to file an emergency petition and, if necessary, to have a hearing without leaving their home. That procedure is posted on the court’s website."

Smith, who has represented five clients whose accounts were frozen when courts shut down, said that she hopes an emergency process to unfreeze accounts would take just days, but that no one has tried it beause no one knew about it until Wednesday.

“It’s an untested procedure,” she said. “It’s not guaranteed, and for people who have a valid judgment against them and whose funds are not protected under any existing state exemption, there’s nothing they can file to get their money. They’re just going to lose it."

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In Washington, lawmakers and lobbyists have scrambled to protect the stimulus payments from debt collection. The federal relief law that Congress quickly passed exempted the funds from debts owed to federal and state agencies but did not address court-ordered garnishments to pay creditors. Although lawmakers didn’t directly carve out the payments from private debt collection, some have said their intent was clear: to ensure Americans experiencing hardships from the crisis receive critical financial assistance.

At least 17 U.S. senators, including one Republican, have signed letters urging the Treasury Department to exempt stimulus funds from private debt collection through its rule-making powers. The department did not return a request for comment last week. The Washington Post, citing unnamed sources, reported that the department is reviewing whether it has the authority to stop the stimulus seizures.

In another letter, 25 state attorneys general, including Pennsylvania’s Josh Shapiro and New Jersey’s Gurbir Grewal, asked the Treasury Department to take immediate action to address the issue. “During this public health and economic crisis, the states do not believe that the billions of dollars appropriated by Congress to help keep hard-working Americans afloat should be subject to garnishment,” the letter said.

And in an unlikely alliance, consumer advocates and the banking industry jointly called on congressional leadership to clarify that the payments are subject to federal exemption from garnishment, like Social Security.

“Many wonder if it was simply a legislative drafting oversight or an error, or whether Congress intentionally chose not to confer the status of a federally protected benefit payment on these economic impact payments," said Lori Sommerfield, a Minneapolis attorney who has closely tracked the law and represents the banking industry for the Philadelphia-based law firm Ballard Spahr. “In any event, it’s creating a lot of issues for the banking industry, including reputational risk.”

For their part, debt collectors say they have been wrongly vilified. ACA International, an association of credit and collection professionals, said its members are complying with myriad consumer protection laws and regulations, and aren’t targeting consumers facing financial challenges.

“ACA members could not and would not be specifically targeting stimulus funds for multiple reasons, including their commitment to compassion and empathy for consumers,” the group said in a statement. “Beyond that, collectors would not even know the character of funds contained in a consumer’s bank account or the source of these funds, which would make it impossible to target stimulus funds.”

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Smith, the CLS attorney, said she was able to help unfreeze bank accounts for four clients through negotiations with opposing lawyers. One client was a 52-year-old mother of three from North Philadelphia, whose account was frozen as a result of fraudulent debt. She didn’t open the account that resulted in the judgment against her, Smith said.

The woman, who spoke to The Inquirer on the condition that only her last name, Sanders, be used, said she recently lost her job as a school bus driver due to the pandemic. Between that and being locked out of her bank account for about two months, she was scared someone would show up at her home one day to seize her car and her furniture to pay off the mysterious debt.

“I was so nervous and shook up,” she said. “I was on edge for months, and I just prayed.”

The Philadelphia Inquirer is one of more than 20 news organizations producing Broke in Philly, a collaborative reporting project on solutions to poverty and the city’s push toward economic justice. See all of our reporting at brokeinphilly.org.