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Are My Monthly 2021 Child Tax Credit (CTC) Payments Exempt From Creditors in California?

Are My Monthly 2021 Child Tax Credit (CTC) Payments Exempt From Creditors in California?

The federal government Child Tax Credit (CTC) payments are subject to attachment by creditors unless protected by a state exemption.
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Updated: 2021-09-09 by

CONTENTS

This article is adapted from a public report from the National Consumer Law Center, about how consumers can use state exemption laws to protect their monthly Child Tax Credit (CTC) payments from garnishment as it's deposited in their bank account.

We have extended  the information provided in that article to provide you with local information about California’s exemptions where relevant. 

We have merged NCLC's excellent 50 state survey of the laws in this area, with our direct links to primary law in our exemption tables, and provided specific statutory citations for each state, for the types of laws they mention, and then localized it to be jurisdictionally relevant to your zip code.

What Is the 2021 Child Tax Credit (CTC) Payment, and How Do I Claim It?

Much has been written lately about the new monthly Child Tax Credit payments that many Americans parents started receiving on July 15, 2021.

These payments will last for one year only, unless it's made permanent, via other legislation.

This article discusses ways parents can use various state and federal laws to "exempt" payments from garnishment by creditors of various kinds, as the funds are deposited into their bank accounts. 

What protection from garnishment does California  offer for CTC funds deposited into your bank account?

A self-executing exemption for automatic protection for $1,788 in a bank account. Cal. Civ. Proc. Code § 704.220

In addition, the Attorney General’s June 8, 2021 Statement states that, “April 23, 2020, Executive Order makes it unlawful to garnish any financial assistance provided to individuals as a result of the COVID-19 pandemic. The Executive Order’s protection extends to the Child Tax Credit, which was enacted as part of the American Rescue Plan in response to the pandemic.”

There is also an automatic exemption for $1,750 ($2,600 for two or more depositors) of directly deposited public benefit funds, or the first $3,500 ($5,250 for two or more depositors) of directly deposited Social Security funds. In addition, the rest of the account is exempt insofar as it consists of exempt benefits. The exempt portion of wages remains exempt after deposit.

Two Parts of the Child Tax Credit (CTC): 

The Child Tax Credit (CTC) comes in two parts:

  1. a monthly advance payment,
  2. and then a lump sum credit/payment upon filing a 2021 tax return.

Some garnishment laws (pertaining to student loans) only affect the monthly advance payments. (See below)

1. Monthly - "Advance" CTC Payments:
up to $300 per child under 6;  up to $250 per child under 18

The Federal Government, via the Treasury (IRS), is sending advance Child Tax Credit payments to eligible families on the 15th of each month, via direct deposit into bank accounts, or check, or prepaid card account.

The the monthly amount is up to $300 a month per child under age 6 and up to $250 a month per child, depending on your annual income.

Child must be under age 18 as of December 31, 2021, .

2. Annual - One-Time, End of Year CTC Benefit Via 2021 Tax Return:
up to $1,800 per child under 6; up to $1,500 per child under 18

These families also will receive an additional Child Tax Credit of up to $1,800 per child under age 6 and up to $1,500 per child under age 18 through their 2021 tax return.

Who Qualifies for the CTC (Child  Tax Credit)?

Parents can qualify for the advance CTC payments one of three ways:

1. The parent must have filed a 2019 or 2020 tax return and claimed the Child Tax Credit on the return.

2. Alternatively, if the parent did not file a return, the parent qualifies if the parent provided the Internal Revenue Service (IRS) information in 2020 to receive the Economic Impact Payment using the “Non-Filers: Enter Payment Info Here” tool.

3. Otherwise, a qualifying parent can still receive the advance payment by completing the IRS’s Child Tax Credit Non-Filer Sign-Up Tool.

Parental Income Limits:

The full credit is available to:

  • those with an adjusted gross income on a recent tax return under $150,000 when filing jointly
  • under $112,500 if filing as head of household, or
  • under $75,000 if a single filer or married and filing a separate return.

Those with higher incomes may still receive the credit, though the amount of the credit is reduced and subject to a phaseout as income increases.

Parental Residency Requirement:

The parent (or a spouse on a joint return) must have

  • a main home
  • in the United States
  • for more than half the year.

For a child to be eligible:

  • the child must be under age 18 at the end of 2021
  • and have a valid Social Security number.

How to confirm if you qualify, or update your information with the IRS

The IRS Child Tax Credit Update Portal allows parents to check if they are enrolled to receive advance payments, to change their number of dependents, and to provide or update direct deposit information.

Taxpayers who may receive advance payments to which they are not entitled can also use the portal to unenroll from advance payments, to avoid having to repay the credit through higher taxes on their 2021 tax return.

Where do the advance payments go?

All July 15 payments will go to:

the address on file with the IRS,

Sent as:

  • a direct deposit to a bank account or
  • prepaid card account or
  • as paper check.

How to update your information with the IRS

Any changes made by August 2 on the Child Tax Credit Update Portal will apply to the August 15 payment and to subsequent payments for the rest of the year.

What if I forget to enroll?

Taxpayers who are not enrolled for advanced payments, but who qualify for the Child Tax Credit based on their 2021 income can claim the entire credit, including the amount that would have been paid in advance, when filing their 2021 tax return.

The IRS also has a set of frequently asked questions that may be updated during the year.

How to Protect Your CTC Payment From Creditors

Note: Unlike earlier stimulus payments, there is no automatic Federal garnishment protection for deposited CTC payments.

While the December 2020 legislation providing the second stimulus payments did protection those payments from garnishment, the March 2021 legislation that authorized the third stimulus payment and the advance Child Tax Credit payments did not include any protections from garnishment.

The March 2021 legislation was enacted under budget reconciliation rules that allow only certain provisions to be included in the legislation.

Thus, there is no special federal protection for bank account garnishment for Child Tax Credit payments.

The rest of this article discusses how to protect your CTC payments from two kinds of actions by creditors

Student Loans:
Intercepts to Repay Defaulted Federal Student Loans

Generally speaking, tax refunds to federal student loan borrowers (but not those with private student loans) are subject to intercept pursuant to the Treasury Offset program, if you have defaulted on your federal student loan.

This applies even to refunds entirely comprised of the Earned Income Tax Credit and/or the Child Tax Credit.

However, some good news for the approximately 9 million Americans are in default on their federal student loans: 

The advance monthly Child Tax Credit payments are protected from offset to repay defaulted federal student loans, even though, the portion of the Child Tax Credit that may be paid out as a refund as part of a tax filer’s annual federal income tax return is not protected from offset and thus may still be seized from borrower’s with defaulted student loans.

Here are the details:

Advance Child Tax Credit payments are not subject to intercept.

Section 9611(e)(3) of the American Rescue Plan specifies:

(3) EXCEPTION FROM REDUCTION OR OFFSET.—Any payment made to any individual under this section [which governs the advance Child Tax Credit payments] shall not be—

“(A) subject to reduction or offset pursuant to subsection (c), (d), (e), or (f) of section 6402 or any similar authority permitting offset, or

“(B) reduced or offset by other assessed Federal taxes that would otherwise be subject to levy or collection.

26 U.S.C. § 6402(c) addresses child support offsets; § 6402(d) addresses debts owed to federal agencies (i.e., student loans owed to the Education Department); § 6402(e) addresses state income tax debts; and § 6402(f) addresses unemployment overpayments.

Again, this only applies to advance monthly payments. the end of year refund from CTC are subject to intercept

 

Judgment Creditors:
Avoiding Bank Account Garnishment

For debts other than federal student loans, your bank account can be garnished if you have an unpaid court judgment, so if the IRS is depositing your payment in your bank account, such a garnishment order on your bank is likely to freeze funds in your account up to the amount of the garnishment order.

What you can do if you receive a "notice of garnishment"

You will receive notice of this if your bank account is being garnished.

If you not contest the garnishment within a short period, the funds will be turned over to the judgment creditor.

If you believe that the funds should not be garnished, you must persuade a court that:

  • frozen amounts in the bank account are "exempt from seizure",
  • and thus should not be turned over to the judgment creditor. Instead, the funds should be unfrozen and released to the you.

For more information about Wage Garnishment in California, click here.

Federal "Non-bankruptcy Exemptions" of
Bank Account Deposits of Public Benefits

If your bank account has received payments from any of the following within the two months before the garnishment, your bank account may be exempt up to a specific amount, equivalent to the amount of that benefit. 

  • Social Security (including Social Security disability),
  • Supplemental Security Income (SSI),
  • Veterans Administration (VA),
  • federal Railroad Retirement,
  • federal Railroad Unemployment and Sickness,
  • federal Civil Service Retirement System,
  • or federal Employee Retirement System benefits

Special rules apply that require the bank to protect two months’ worth of the funds. That amount can neither be frozen nor seized. Importantly, the amount that was deposited is protected, whether or not the amount in the account at the time of the garnishment can be traced to those federal benefits.

 

State Exemption Protections of
Bank Account Deposits and Public Benefits

In some circumstances, a child tax credit that has been deposited into a bank account may be protected from garnishment, so the money once frozen will not be turned over to the judgment creditor if you act quickly.

In certain circumstances state or federal protections will also prevent the funds in the account from being frozen even temporarily.

If you get a notice of Garnishment

If you live in a state with a non-automatic protection for funds in a bank account, the burden will be on you to ask the court to unfreeze the funds because they are exempt from garnishment.

You should receive notice of the garnishment with instructions on how to contest the seizure.

You then have a number of grounds to claim that amounts in a bank account, including the payments under the Child Tax Credit program, are exempt from seizure and should be available to you:

Sources of State Exemptions That May Protect CTC Funds

Direct legislation about CTC funds:

State Law, Broadly-Worded "Public Benefits" Exemptions

  • Many state exemption statutes list the specific public benefit programs whose payments are exempt, and some exemption statutes apply broadly to “public benefits” or “public assistance benefits,” and these may apply to Child Tax Credit payments.
    • See NCLC’s Collection Actions § 14.3.2Appx. H
    • See also In re Hardy, 787 F.3d 1189 (8th Cir. 2015) (Mo. law); 
    • In re Moreno, 2021 WL 1904189 (Bankr. W.D. Wash. May 11, 2021); 
    • In re Farnsworth, 558 B.R. 375 (Bankr. D. Idaho 2016); 
    • In re Hatch, 519 B.R. 783 (Bankr. S.D. Iowa 2014); 
    • In re Vazquez, 516 B.R. 523 (Bankr. N.D. Ill. 2014).

Emergency Orders During COVID-19

  • A significant number of states issued emergency orders during the COVID-19 pandemic protecting bank accounts from any attempt at garnishment, and a few such orders are still in effect, thus preventing any freeze of an account.

Bank Account and "WildCard" Exemptions

  • About a dozen states protect a certain dollar amount in a bank account, although those amounts vary significantly from state to state.
  • About 20 states have wildcard exemptions that can be applied in whole or in part to bank accounts, and not just to other property subject to judgment creditors. Applying a portion of the wildcard amount to the bank account can thus exempt the Child Tax Credit payment.

Note: Some Public Exemptions Do NOT Apply

States have many other protections that exempt certain funds in a bank account from garnishment but that do not protect an advance Child Tax Credit payment.

Examples are:

  • educational savings accounts,
  • workers compensation payments,
  • and specified public benefit payments under state law.

Table 50-State exemptions that may protect a monthly Childcare Tax Credit (CTC) payment from garnishment from creditors, as it's automatically deposited into a debtor's bank account:

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Useful Web Resources

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