Social Security has gone electronic. Effective May 1st, new Federal benefit applicants must choose one of the two electronic payment options: direct deposit or prepaid cards (preferably the Direct Express® Debit MasterCard® card). Most all current beneficiaries that receive paper checks must switch to the new system by March 1, 2013.
Here are two things you should know:
– If a Social Security beneficiary does not have (or cannot get) a bank account, his or her best option is the Direct Express Debit Mastercard. With this card, there are no transaction fees when you use the card at merchants, you get one free cash withdrawal from an ATM each month, and (supposedly) you can get unlimited free cash withdrawals from most bank tellers. (In fact, with banks charging more and more fees for checking accounts, this may even be an attractive option for beneficiaries that can get by without writing checks.) It is possible to get certain prepaid cards other than the Direct Express Debit Mastercard, but it is not recommended because they will most likely have additional fees.
– Creditors should not be able to reach Social Security. But creditors have been able to get a hold of Social Security funds in bank accounts that contained both Social Security and other funds (a “commingled” account). A beneficiary could recover these funds by objecting to the garnishment in court, but many (if not most) beneficiaries either did not know how to do this or did not understand that they could object in the first place.
The new rules provide some additional protection. Before a bank can garnish an account containing Social Security funds, the bank is obligated to protect two months of those payments from seizure to satisfy garnishment orders. The beneficiary will still likely have to go to court to recover additional Social Security funds (if any).
If a beneficiary has credit problems and needs a checking account, I still recommend having a checking account that only contains Social Security payments and is not commingled with other funds. If checks are not needed, the prepaid credit card may be a good solution. Never allow a beneficiary to take funds from a prepaid card and then deposit those funds into a bank account. At that point, it will be very difficult to convince a judge that those funds are Social Security funds and the beneficiary will not get the new federal garnishment protections.
When Social Security first announced that all payments would have to be electronic, I was concerned. But the combination of offering the low fee prepaid card and providing greater garnishment protections from creditors offers a good compromise.
Christopher W. Smith is an elder law attorney that specializes in aging and special needs issues. He can be found at http://www.smithelderlaw.com and on Twitter @ElderPlanning and is licensed to practice law in Michigan and Indiana.