Bank of America Garnishees Social Security Payments to Collect Overdraft Fees

You're at the grocery store waiting to pay $5.60 for tomato juice and a salad. Little do you know, you are overdrawing your bank checking account. Then the bank hits you with a $35 overdraft fee—which it will take from the next Social Security payment the government deposits directly into your account.

Is this right? Is this legal?

AARP says no on both counts and filed two friend-of-the-court briefs on behalf of Paul Miller and more than 1 million other Bank of America customers, arguing that this practice violates state and federal law. The case potentially affects millions of other Americans at other banks and has drawn the attention of Congress.

"This is just a terrible situation for so many people who are poor and need their Social Security payments to pay for food, medicine and rent," says AARP attorney Barbara Jones. "Most of them don't even know they've overdrawn their accounts."

John Wheeler, 74, and his wife, Gloria, 70, of Oakland, Calif., are two of those affected by the Bank of America practice. Wheeler receives $1,700 each month in Social Security payments. As public benefit payments, the deposits are exempted by federal law from garnishment. But state courts have whittled that protection, in part because banks say they cannot identify the source of funds directly deposited into personal bank accounts. As a result, Wheeler says, a $52 overdraft charge fee was recently assessed by the bank and taken from his Social Security deposits. "It's just outrageous what they've done," Wheeler says.

Bank of America took fees from Social Security payments until a 2004 San Francisco district court ruling awarded Miller and other plaintiffs $296 million in fees it determined the bank had collected improperly.

Bank of America appealed to the California Court of Appeals, insisting that its practice of charging so-called setoffs, or overdrafts, is fundamentally different from garnisheeing the accounts of people who may owe money to creditors for unpaid credit cards or other debts. In November 2006 the court agreed with the bank. Miller, who lives in San Francisco, and AARP appealed to the state Supreme Court.

A proposed law before Congress would require banks to warn customers when an ATM withdrawal or debit card purchase will trigger an overdraft fee—and allow customers to cancel the transaction at that time.

Emily Sachar is a journalist and author based in Brooklyn, N.Y.