The attorneys general of New York and Massachusetts have issued guidance exempting the Economic Impact Payments (stimulus payments of up to $1,200 for individuals) from garnishment within their respective states. On April 13, 2020, attorneys general of 25 states sent a letter to the Secretary of the Treasury requesting that the Department of the Treasury (Treasury) take action to ensure that Economic Impact Payments are exempt from garnishment by creditors or debt collectors. While Treasury has yet to act on the multistate request, the attorneys general of Massachusetts and New York have acted to shield individuals within their respective states.
The attorneys general have applied different legal analyses but arrive at the same conclusion—the Economic Impact Payments are off-limits for garnishment or attachment by creditors. The guidance from the Massachusetts attorney general cites Massachusetts law exempting "public assistance" from garnishment or attachment by creditors. The guidance finds the Economic Impact Payments to constitute "public assistance" and exempts the funds from seizure, including garnishment and attachment. The guidance from the New York attorney general focuses on state and federal laws prohibiting unfair, deceptive, and abuse acts or practices (UDAAP) and concludes that garnishment of the Economic Impact Payments would constitute "illegal acts" under that statutory regime.
Financial institutions and collectors – as well as associated third parties – are impacted by the guidance. The Massachusetts guidance extends its exemption to apply, "regardless of the manner in which the funds are deposited or thereafter held." New York's guidance expressly includes banks' right of setoff in its exemption and also warns that "any person who knowingly or recklessly provides substantial assistance to a creditor or debt collector in garnishing CARES Act payments will face aiding and abetting liability under Dodd-Frank."
State governments have been proactive in their efforts to shield consumers from collection efforts during this period. For example, the District of Columbia, Massachusetts, and Washington have issued general prohibitions against garnishment for consumer debts, the scope of which varies among the jurisdictions. Financial institutions and collectors should act with caution and monitor ongoing developments by both the federal and state governments. Institutions may run into challenges in updating automated activities and process flows, as well as installing adequate controls for non-automated processes, and so should move quickly and document all efforts to comply with the states' guidance.