How Unpaid Debt Reduces Social Security Payments

Aug 23, 2019 / Amanda Chase, Horsesmouth Assistant Editor

As a group, older Americans’ debt burden continues climbing. In the 60–69 age group, total consumer debt—i.e., mortgages, loans, credit cards—is nearly $2.2 trillion, compared with $380 billion in 1999, according to the latest data from the Federal Reserve Bank of New York. Among those age 70 and older, it’s close to $1.2 trillion, up from $180 billion in 1999. At the same time, people in their 60s are typically transitioning to retirement and going on Social Security. Social Security promises guaranteed monthly income, except for those who have certain kinds of unpaid debt.

While delinquency rates remain relatively low (below 1.5%) across most types of consumer debt for people age 60 and older, those who are in danger of defaulting should know whether it could affect their Social Security income. Same goes for other types of financial obligations, like back taxes or unpaid child support.

  • For delinquent federal income taxes, the Treasury Department can either levy up to 15% of your benefit until the debt is repaid, or, less frequently, garnish everything but living expenses until you’ve paid it off. People who owe back taxes should reach out to the IRS instead of ignoring the debt. Depending on your situation, you could qualify for a payment plan to tackle it over time, or you might be able to negotiate a lower bill. In some cases of extreme economic hardship, you could have the debt erased altogether.
  • The Treasury Department also can garnish Social Security checks for debt that originated with other federal agencies, such as the Education Department—i.e., federal student loans. In this situation, up to 15% also can be withheld, but that garnishment cannot reduce your monthly benefit below $750. the number of Social Security recipients 65 and older who had their check reduced due to defaulted student loans increased by more than 500% between 2002 and 2015, according to a report from the Government Accountability Office.
  • If you’ve fallen behind on child support or alimony (also known as spousal support), a judicial order could result in your Social Security benefits being garnished, but only if the parent of the child or the ex-spouse goes to court and seeks payment. Exactly how much could be withheld depends on the state you live in. It could be up to federal limit, which is 50% of your benefits if you are supporting another spouse or child. If you’re not in that situation, it’s 60%. And if you’re behind more than 12 weeks, up to 65% can be taken.
  • Your payments could be reduced by up to 25% due to court-ordered restitution to a victim of a crime you were convicted of.

Generally speaking, banks and credit unions are required under federal law to ensure that any Social Security funds electronically deposited in the previous two months are protected from those court-ordered garnishments. However, if you transfer the money to a different account, or the money remains in your account for more than two months, it could be fair game for debt collectors.

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