Can Banks Legally Take Overdraft Charges From Social Security Benefits?

If you have overdraft charges on one account, you might find that the bank later takes money from an account holding your Social Security benefits. A bank that seizes Social Security might put you in a quandary, because people who receive Social Security benefits tend to have a limited budget. Patronizing several financial institutions mitigates some of the risk of losing your Social Security benefits to overdraft charges.

Banks can legally recover overdraft charges from your Social Security benefits by exercising their right of offset. The right of offset lets a bank take funds from a deposit account to pay a debt owed to the bank. For example, if you owe Bank 1 overdraft charges, it can seize funds from a deposit account held at Bank 1, not any other bank. Unless state law exempts Social Security benefits from offset, this is a legal move.

Normally, banks do not let a creditor seize Social Security funds due to federal law. However, when you commingle non-exempt funds and Social Security benefits, the bank might not realize you have exempt funds. If the bank obtains a bank levy order, it might be able to take Social Security benefits in a commingled account at another institution.

A federal regulation introduced in 2011 requires banks to check an account for government benefits when it receives a bank levy order. However, this only applies to recipients of benefits who direct deposit funds into their account and it only guarantees protection for two months' worth of payments. If you deposit by check, the bank does not need to check for federal benefits unless you notify the bank of exempt funds.

If a bank used the right of offset to procure your Social Security benefits, you may need a lawyer to determine what, if any, course of action you can take. The best solution is to watch your balance in the future so you do not withdraw more than what you have in your account. You could direct deposit your Social Security funds in one account and link the rest. Then, if you accidentally overdraft your account, the bank automatically withdraws from any linked savings account. Also, spread your accounts over several banks to prevent use of the right of offset.