Warning about garnishing wages. Warning about garnishing wages. (Source: Shutterstock)

Federal law may not exempt a taxpayer’s coronavirus crisis payment from being seized from their bank account, but New York state law does. On Monday, New York state Attorney General Letitia James warned credit unions and others not to subject the funds to garnishment.

James’ comments followed news that some people who receive federal stimulus payments are having their payments seized to pay their debts.

“Banking institutions are advised that they should treat CARES Act payments as subject to the same protections as statutorily exempt payments,” James said.

New York credit unions should follow James’ guidance closely, Henry Meier, general counsel of the New York Credit Union Association, said Tuesday in his blog, “New York’s State of Mind.”

“New York’s Attorney General has put everyone on notice that she has a good faith basis for taking legal action against any institution which decides to take some or all of these steps,” he wrote in his blog, which he emphasizes represents his own opinion.

Meier said some credit unions have said they may use the funds to capitalize negative account balances.

He urged them not to do so.

“This is not the time for aggressive legal interpretation,” he said. “There are no great principals at stake here. Don’t put yourself in a situation where, in a best-case scenario, your credit union secures the right to government stimulus checks which cover a fraction of the legal costs it will have to pay to lawyers.”

A coalition of trade groups, including CUNA and the American Bankers Association, said Congress failed to define the payments as subject to preemption from garnishment.

As a result, financial institutions that do not have state laws like New York are potentially obligated to allow the funds to be seized.

The Treasury Department reportedly is examining the issue.

The trade group representing collection agencies disputed the notion that debt collectors are anxious to seize the coronavirus payments.

Professional debt collectors do not know the source of the funds in a consumer’s bank account, Mark Neeb, CEO of the Association of Credit and Collection Professionals, said in a letter to Treasury Secretary Steven Mnuchin.

“In fact, only financial institutions would know the source and character of deposited funds, and non-electronic deposits may be more difficult to identify, even for financial institutions,” he said.

He added that any problems for consumers that might develop “could be more easily solved through a conversation, rather than in complex legislation.”