Can Debt Collectors Take Your Stimulus Check? You May Not Be Protected

The $1.9 trillion COVID-19 relief bill was signed into law on Thursday by President Joe Biden, so Americans will each receive a third stimulus payment of $1,400.

Third stimulus checks are protected from being seized for tax, child support and other government debts.

However, private creditors and debt collectors can use stimulus funds to cover fees such as civil damages or consumer debt. The Internal Revenue Service (IRS) could also potentially access stimulus payments claimed through Recovery Rebate Credit (RRC).

The Consumer Financial Protection Bureau (CFPB) advises: "Your Economic Impact Payment [stimulus payment] will not be subject to most types of federal offset or federal garnishment as a result of defaulted student loans or tax debt.

"The payments may also still be subject to state or local government garnishment and also to court-ordered garnishments," the CFPB adds.

Garnishment sees creditors take a portion of your wages or money from your bank account to collect debt. Most garnishments take place by court orders following a judgment in a lawsuit.

"Certain debts owed to the federal government, such as to the IRS, may result in a garnishment without a court order," the CFPB explains.

Here we take a closer look at which types of debt could be covered using third stimulus payments.

Private debt

Unlike the second round of payments, third stimulus checks are not protected from garnishment "due to limits associated with the budget reconciliation process" used to pass the bill, the American Bankers Association said.

Joined by several other financial and consumer groups, ABA sent a letter to Congress on Monday urging lawmakers to pass legislation to "shield these EIPs [Economic Impact Payments] from assignment and garnishment."

The letter stated: "We believe it is imperative that Congress ensure that these next stimulus payments are treated as 'benefits' subject to the federal exemption from garnishment.

"Otherwise, the families that most need this money—those struggling with debt and whose entire bank accounts may be frozen by garnishment orders—will be not be able to access their funds," the letter added.

Bank overdraft

For those receiving their stimulus payment as a direct deposit, individual banks can choose to use it to pay overdraft fees once the funds reach your bank account, according to a report by The New York Times.

Intuit, the developer of tax-filing software TurboTax, said: "Federal law allows only state and federal government agencies (not individual or private creditors) to take your refund as payment toward a debt.

"However, once you deposit the refund into your bank account, these rules no longer apply. Depending on the laws of your state, private creditors may have access to those funds," TurboTax adds.

Unpaid taxes

If you qualify for RRC after not receiving your stimulus payment, the IRS could potentially use funds claimed through RRC to cover any tax owed, according to the Taxpayer Advocate Service (TAS), an independent organization within the IRS.

The Consolidated Appropriations Act, 2021 (CCA) protected the second round of stimulus payments from being offset, including for overdue child support.

However, the CCA "limited that exception only to advance payments and retroactively revised CARES Act Section 2201(d), subjecting RRCs to regular offset rules for unpaid federal taxes and certain other debts," according to TAS.

This means if you have "not yet received your full EIP and you have certain outstanding debts, some or all of your unpaid stimulus payment will be withheld to offset those debts," TAS said.

To make matters worse, "some offsets of overpayments attributable to unpaid federal tax liabilities may be inaccurate," TAS notes.

Nearly seven million 2019 income tax returns and millions of other taxpayer correspondences were yet to be processed as of Christmas last year, according to the IRS.

"As a result, the tax accounts of millions of taxpayers may not be properly adjusted...the IRS may end up offsetting refunds to satisfy federal tax debts that no longer exist," TAS explained.

Child support and student loans

As mentioned with tax debts, the IRS is also able to use your RRC to cover any unpaid child support and student loans.

"This approach–forcing eligible individuals to forgo receiving an EIP that was exempt from offset if paid timely–is a problem the law and the IRS have created. With the change in the law made by the CCA, the rug is being pulled out from under eligible individuals with outstanding debts," TAS argues.

Following discussions with TAS, the IRS was reported to be "looking into this issue and is exploring ways to exercise its discretion to help vulnerable taxpayers," TAS said in late January.

The graphic below, produced by Statista, illustrates the composition of the $1.9 trillion stimulus package.