People normally cannot afford to buy a home outright, so they go to mortgage lenders, take out loans and use the loan funds to purchase the home. They then pay the mortgage lender back the amount of the loan, plus interest. Sometimes homeowners are not able to meet the terms of their loan agreements, however. Homeowners in this predicament often are Social Security recipients, which raises the issue of the impact of foreclosure on these benefits.
When a mortgage lender wants to foreclose on your home, it cannot do so without proving you actually violated your contract. Most foreclosures happen because of the violation of nonpayment. To prove the lender has a right to take back the home, it must sue you in court. If you don't pay what you owe once a judge finds in favor of the lender, the lender can proceed with the foreclosure, which involves the sale of your home to collect funds to cover your debt. The problem is that lenders are not always able to sell a foreclosed home for the mortgage amount. Subsequently, the lender still has money it needs to collect from the former homeowner. To get this money, the lender can ask the court for permission to use other means of debt collection, such as garnishment.
The government outlines a person's right to his Social Security benefits in Section 207 of the Social Security Act, 42 U.S.C. § 407. These regulations explain that Social Security benefits are not subject to either levy or garnishment. The law also says the funds are not to be included in bankruptcy. In laymen's terms, this means your lender cannot take your Social Security to cover mortgage debt not covered by foreclosure sale, as the funds are exempted.
Even though Social Security money is protected by law from lenders, in the past, banks routinely froze bank accounts that held Social Security money. They had to comply with court orders stipulating the freeze should occur, but were not obligated to check that the account was free from exempted funds first. Account holders could file an exemption statement to make a case that some of the money was off limits, but not everyone could prove the source of the money in the account and therefore lost some of their Social Security funds. New regulations that became effective May 1, 2011 now require banks to take more precautions before freezing the account, but the regulations don't cover deposits made by paper check or older than two months. The law affords the most protection to those who have electronic deposit.
The Bottom Line
By law, mortgage lenders are not supposed to take your Social Security funds, and new regulations offer more protection to recipients than in the past. However, the possibility still exists that some Social Security funds can get wrapped up in a frozen account and therefore be lost. It is better to open a separate account for your Social Security funds and use direct deposit. This way, there is no question that the funds in the account are exempt from your mortgage lender's attempts to collect.
- Findlaw.com; 42 U.S.C. § 407 : US Code; 2011
- Bankruptcy Law Network; Can Bankruptcy Affect My Right to Receive Social Security Disability Benefits?; Jonathan Ginsberg
- Nolo's Bankruptcy and Foreclosure Blog; Protection From Garnishment for Social Security, Veterans Benefits; Kathleen Michon; May 12, 2011
- Disability Rights Law Center; Banks May Not Garnish Social Security to Pay Mortgage Deficiency; January 2011
- Social Security Administration: Social Security Act 207
- Moran Law Group; Social Security Is Safe from Collectors; March 2007
- David Sacks/Lifesize/Getty Images