Don’t Let Your Relief Check Disappear Into Your Debts

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Editor's note: This story has been updated to reflect details of the American Rescue Plan signed by President Joe Biden.

A third round of federal relief payments meant to help consumers battered by the COVID-19 pandemic is coming. But some people could be in for disappointment if they have outstanding debts.

The payments can’t be seized for outstanding child support, back taxes or federal student loan debt. However, they can be diverted if you’re facing a private debt collection action.

Here’s how your relief money could be diverted, and how to prepare.

Understand how much is coming, and in what form

Not everyone qualifies for the relief payment. Here's how it breaks down:

  • A payment of $1,400 goes to individuals making up to $75,000 a year in adjusted gross income. The amount dwindles as income rises. Those with AGIs of $80,000 and above get no payment.

  • The full $1,400 also goes to people filing as head of household with AGI of up to $112,500. Payments drop with higher AGIs, and those with AGIs of $120,000 and above won't receive a payment.

  • Couples filing jointly qualify for $2,800 up to $150,000 AGI. Likewise, payments decrease as income increases. Those with AGIs of $160,000 and above won't get a payment.

Parents will also receive $1,400 per dependent, subject to the same income restrictions.

Payments will come most quickly to those who have a bank account set up to receive direct deposit of their tax refund or benefits such as Social Security. For those without direct deposit instructions active with the IRS, past payments have been sent as paper checks or prepaid debit cards.

The IRS has updated its website with details of the American Relief Plan. Its “Get My Payment” tool is the main source of information on how much to expect, in what form and when.

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Expecting direct deposit? Understand what could divert it

Money will not be diverted to pay outstanding child support that's been referred to the IRS Treasury Offset Program, or to pay back taxes and other government debt.

But other types of debt could endanger your deposit.

You owe your bank

Look into whether the account you use to receive tax refunds has outstanding overdrafts or other fees, or whether you owe that financial institution money, such as for a delinquent loan. If so, the bank could take your deposit. "Most banking and lending agreements have 'set off' provisions that give the bank the right to use deposit account funds to pay other debts owed to that bank," says Cara O'Neill of Nolo.com, a legal advice website.

Also, check what account you designated to receive your tax refund on your most-recent return. If you’ve closed it, the payment could bounce back to the IRS. If it’s an account you’ve abandoned without closing, the payment may go through and be lost to outstanding fees.

You could try to quickly register a different account to receive the payment, using the IRS Get My Payment site. However, if you don’t already have an alternate account, it could be challenging to open and fund one now.

If you’re aware that you owe the bank, ask whether it has a policy of not seizing stimulus money. You could also check with your state attorney general’s office to see if debt collection actions have been suspended. Suzanne Martindale, senior policy counsel with Consumer Reports, notes that some states have put limits on collections.

You owe a debt collector

If you have a delinquent account, a debt collector may have sued you for payment and gotten a garnishment order or bank levy. You should have gotten a notice about the court hearing and the garnishment. If you’ve lost money in the account to previous garnishments, those orders could still be in effect. "Someone who ... has been sued by a creditor or landlord should suspect that a levy might occur," O'Neill says.

If you think your account is subject to garnishment and your state hasn’t halted collections, the NCLC advises watching your account closely and immediately moving your payment out. You could transfer it electronically to another account, use it immediately to cover your most-pressing bills or simply withdraw cash.

If your payment is seized by a creditor, O'Neill recommends you act quickly to file an objection.

No direct deposit? You have options

If you will receive a paper check, you have good options to avoid losing it to collectors — but payment will take longer to arrive. The nonprofit National Consumer Law Center suggests simply cashing the check rather than depositing it into your bank if there could be an active garnishment order on your account. Its website advises: “Grocery stores or other merchants may accept the checks and provide cash back that can be saved or loaded onto a prepaid card.”

But do the math first, the NCLC advises, as check-cashing fees can be steep and could outweigh the cost of paying off your bank debts.

And of course a prepaid debit card keeps the money in your hands, not collectors'. But you'll need to be on the lookout for your card to arrive. During the second round of payments, some people thought the cards were a scam or junk mail and threw them out.

Do you receive Social Security or other benefits? Know about protections

If you receive Social Security, Supplemental Security Income, veterans benefits or some other federal benefits by direct deposit, the account that receives those deposits has some protections.

An amount totaling two months of your benefits is shielded from garnishments, but only in the account that receives the direct deposit. If you transfer money to another account, you lose the protection.

The NCLC notes that it’s not the source of the money that matters, it’s the total, so you may need to manage your account balance. It gives this example: “If two months of federal benefits for a Social Security recipient is $2,000, their account will be fully protected from garnishment if ... the total amount is less than $2,000. Before the next Social Security or other benefit payment is deposited, however, they will need to withdraw additional amounts to keep the new balance under $2,000.”