If you have a judgment against you or you have defaulted on a debt, your creditors have a right to garnish your wages and seize your assets to pay off the debt. Should your bank account be subject to seizure, any funds deposited at the time will be frozen and unavailable to you, unless the source of the funds is exempt income. Many federal benefits, such as educational assistance, qualify as exempt income.
Pell Grants
A Pell Grant is a federal program that provides financial assistance to low-income undergraduates, and some postgraduates, to attend institutions of higher learning. The grant is based on expected family financial contributions, the cost of the college and your enrollment status, whether full-time or part-time. The grant is paid directly to the educational institution, to the student, or a combination of both. If you deposit these funds into an account that is subsequently frozen, these funds could be unavailable to you.
Exempt Income
Certain government benefits are exempt from wage garnishment, unless the creditor is the United States government. Pell Grants and other federal educational assistance are exempt, as are most federal retirement plans and disability benefits. If you have your Pell Grant direct-deposited, and believe you may be subject to an asset freeze order, you should notify the originator of the funds and have them stop direct deposits and send you a check until you go to court.
Remedy
In some states you must be notified in advance that your bank account will be frozen. If you receive this notice, you have the opportunity to stop the freeze of your Pell funds. If you don't get notified in advance, when the seizure notice comes through, notify your bank that your account contains exempt funds and ask that it unfreeze those funds. If the bank refuses, you must go to court to get a judge's order. At the hearing, bring evidence of the source of the funds and, if the account commingles exempt and non-exempt income, proof of what has been disbursed of the exempt funds so the remainder of the exempt funds can be unfrozen.
New Legislation
On May 1, 2011 new rules for banks went into effect that protect you to some extent should a creditor try to freeze your exempt funds. When the bank receives the garnishment order, it must look back at deposits in your account for the prior two-month period and determine if one or more exempt funds were direct-deposited into the account. If they were, the bank must allow you access to the lesser of either the amount of the account or the amount of the exempt payments in the account. This is the amount of money in your account that remains protected until the court rules on the status of your funds. The bank must notify you and give you clear instructions on the action it has taken, and the action you must take to prevent further garnishment of your Pell Grant.
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