Assets off-limits to debt collectors

Millions of Americans rely on Social Security benefits, and they’ve been able to count on those dollars being safe from debt collectors under federal law.

A creditor or debt collector can’t garnishee your future Social Security benefits. Even when you deposit your Social Security check in the bank, those dollars continue to be protected, except in a few cases, as long as they can be identified as government benefits, according to the Social Security Administration.

But that’s rapidly changing, warns Rep. Barney Frank (D-Mass.), who said creditors and debt collectors are increasingly managing to garnishee federal benefits from bank accounts. Frank, chairman of the House Committee on Financial Services, asked banking regulators recently what they were doing to protect consumers.

It’s a serious problem, but it raises another question: What other assets are protected from creditors? Protections are often a patchwork of federal and state law.

Here are some of those protected assets:

Creditors can’t go to your employer and tap your pension or 401(k). But this money loses its protection from creditors once you deposit your pension check or 401(k) withdrawals into a bank account.

Individual retirement account protections are spelled out in state law, and those rules tend to vary.

In states that don’t fully protect IRA assets from creditors, the 2005 federal bankruptcy law may provide some shelter. If you’re contributing to an IRA, up to $1 million in assets is protected from creditors in a bankruptcy case, while retirement money rolled over into an IRA is fully protected in bankruptcy, said Natalie Choate, an IRA advisor.

Besides IRAs, the bankruptcy law protects money invested in college savings plans known as 529s.

“The act says that 529 assets are not included in your bankruptcy estate if the money has been there for at least two years and the beneficiary of the account is your child or grandchild,” said Joseph Hurley, founder of savingforcollege.com and a 529 expert. If the cash has been there for less than two years but more than one year, he said, you can shelter up to $5,000 from creditors.

Similar bankruptcy rules apply to assets in a Coverdell education savings account, Hurley said.

Mark Scurti, a bankruptcy lawyer in Baltimore, said every state allows residents to keep a certain amount of real property, which includes equity in a home or cash in the bank.

“The theory is you don’t want to leave a person penniless,” he said.

Of course, there are limits to what can be protected, even with Social Security. You can find that your Social Security benefits are withheld if you owe child support or alimony.

And there’s one creditor that’s never denied.

“The IRS; they can get to anything,” said IRA expert Ed Slott.