Are Child Tax Credit (CTC) Payments Exempt From Creditors in Texas?

 

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

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CONTENTS

This article is adapted from a COVID era  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 Texas’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.

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 Texas, 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.

 


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Jurisdictional relevance: ST

There are versions of this article for each State.