Many Americans waiting on the third round of stimulus checks may find their payments going to debt collectors instead.
The new $1.9 trillion "American Rescue Plan" signed into law on Thursday doesn't prevent stimulus payments from being garnished. While lawmakers tried to include a provision protecting the payments, the way the legislation was passed through budget reconciliation didn't allow for its inclusion.
"It would be terrible if money that Congress authorized to help feed families, take care of people who are struggling...was grabbed by debt collectors to pay ancient debts," Lauren Saunders, associate director of National Consumer Law Center, told Yahoo Money. "That's not why we're enacting this extraordinary relief."
Around 158.5 million households are expected to receive a payment under the new stimulus deal, according to the White House.
The first $1,200 stimulus checks in the spring weren't protected from private garnishment or child support, while the second payments of $600 were fully protected. Some states enacted their own protections against garnishment for the first round.
Any private debt collector that has a judgment against you can garnish the latest round of payments. Credit card and medical debt are the two most likely to be collected by debtors, according to Saunders. Stimulus checks may also be garnished by debt collectors for unpaid private student loans in some circumstances.
However, the payments can't be garnished by the Internal Revenue Service for back taxes or child support offsets.
Sen. Ron Wyden (D-OR) is expected to introduce standalone legislation to protect the third round of checks from garnishment, but it could be too late for some since many of the payments are set to hit Americans' bank accounts in the coming days. If the payments are sent before Congress passes any legislation, they won't be coded in a way that alerts banks to automatically protect them.
Garnishment varies state by state, but usually the debt collector serves the garnishment order on the bank, then the bank freezes the account and gives the consumer notice. The consumer has a short time to go to court to either contest the order or assert an exemption. Unless the court lifts the garnishment order, the bank will eventually turn the money over to the collector.
Consumers may have the option to withdraw their payment before the bank has been served a garnishment. But debt collectors may have a good idea of when the payment may be deposited, according to Saunders.
"If they think they're at risk of garnishment," she said of consumers, "they should watch their account, and take out the money immediately."
Aarthi Swaminathan contributed reporting.