Can Banks and Financial Institutions Offset Against Stimulus Checks?

On March 27, 2020, President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) to provide some financial relief to certain individuals and businesses while the country seeks to manage the COVID-19 crisis. Among other provisions, the CARES Act authorizes the payment of $1,200 to many Americans earning $75,000 or less (and $500 for each child), as well as another $600 per week to certain individuals who qualify for unemployment benefits compensation.

One question that is certain to arise in the coming weeks and months is whether the funds received by these individuals under the provisions of the CARES Act will be subject to third-party collection. For example, what happens when individuals receiving funds under the CARES Act deposit those funds into overdrawn bank accounts? Can the banks levy the overdraft charge(s) against the deposit? Or will these relief funds be marked for special protection? As of now, there remain a number of outstanding questions, with future regulatory guidance forthcoming, but as set forth further below, the currently enacted version of the CARES Act does not preclude collection.

Tax rebates

One of the most notable features of the CARES Act is that it will soon result in a flood of $1,200 checks and bank deposits across the United States. While the media frequently characterizes these funds as relief payments, the CARES Act actually characterizes them as “recovery rebates” that will be reimbursed as refundable tax credits under the federal tax code. Importantly, while the CARES Act sets forth some specific limitations that preclude the government from collecting or offsetting against these incoming refund checks, there are no apparent, specific limitations preventing financial institutions or other third-party creditors from seeking to collect. The resulting presumption is that these funds will receive the same type of treatment as any other tax credit or refund, and receive no additional special protection from collectors.

Unemployment benefits compensation

The CARES Act also provides for additional unemployment benefits compensation to qualifying individuals. One CARES Act section specifically provides for some individuals to receive an additional $600 per week on top of the unemployment compensation amounts determined by each state. However, as with the “recovery rebates” that the CARES Act authorizes under the tax code, the CARES Act does not expressly prohibit third parties from collecting against the recipients of these forthcoming unemployment compensation checks, which leaves it to state law to govern the potential collectability of such funds.  Yet, even so, some ambiguity still exists.  State laws generally prohibit creditors from collecting unemployment benefits amounts from a consumer debtor, but that is not necessarily the case in every circumstance.  For example, in some states, such as California, exceptions exist to allow banks to exercise contractual setoff rights to “recoup [ ] overdrafts and bank fees within a single account.” Miller v. Bank of Am., N.A., 213 Cal. App. 4th 1, 5, 152 Cal. Rptr. 3d 190, 194 (2013).

Conclusion

The CARES Act does not specifically address or prohibit the actions of banks or third-party debt collectors as related to the offset or other rights vis-à-vis stimulus funds. There may be other legal impediments to collection—such as the terms of any loan or deposit account agreement between the bank/creditor and the individual—and future regulatory guidance and state law should address these types of collection issues. But for now, and absent any changes, the CARES Act leaves open the possibility of banks and other debt collectors attempting to satisfy their customers’ debts with the influx of CARES Act funds.