For those who receive monthly government checks, including Social Security and disability payments, electronic direct deposit is convenient. On the first of every month, for example, the money “appears” in our checking account. For those who have difficulty getting around, this saves having to travel to the bank to deposit a monthly check. But there’s a catch.

In a 6/1/09 WSJ article, Ellen Schultz recounts several stories of people who found their bank accounts frozen because of a loophole in the law that prevents banks from seizing payments like Social Security and disability. Several legislators are urging the Treasury to close the loophole.

If a bank receives a garnishment from a debt collector, they may turn over part or all of the money in the account and freeze the account without any advance notification to the owner of the account. This freeze in turn generates a number of “insufficient funds” fees for the bank when it bounces checks that the owner of the account wrote in good faith.

What can we do? Urge your representatives to get this loophole closed immediately. If you or someone you know has funds electronically deposited, ask the bank what their policy is regarding garnishments. If you are having trouble paying bills or are in dispute with someone over a bill, it might be wise to discontinue direct deposit till your situation changes or you are able to resolve the matter.