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 May a credit union offset a member's social security funds if the member's loan is delinquent?
 ABC Credit Union ("ABC") has a member with social security funds directly deposited into his share draft account each month. This member also has a loan with the credit union that is delinquent. Can ABC utilize its statutory right of offset to satisfy the delinquency?
Section 407 of the Social Security Act provides that none of the social security benefits paid or payable to retirees or individuals with physical or mental challenges "shall be subject to execution, levy, attachment, garnishment, or other legal process, or to operation of any bankruptcy or insolvency law." The question here is whether offsetting shares held by the member against the delinquent loan would be considered an “other legal process” and therefore prohibited by section 407.
Courts in different jurisdictions have issued conflicting opinions regarding this issue (e.g., several years ago, a district court prevented a credit union from offsetting social security benefits to satisfy delinquent loan obligations stating that offsetting shares was an "other legal process" and thus violated the Social Security Act).
Recently, however, the United States Supreme Court issued an opinion containing a much more restrictive interpretation of "other legal process" for purposes of section 407 of the Social Security Act. The Court stated "'other legal process' should be understood to be processed much like the processes of execution, levy, attachment, and garnishment, and at a minimum, would seem to require the utilization of some judicial or quasi-judicial mechanism, although not necessarily an elaborate one, by which control over property passes from one person to another in order to discharge or secure discharge of an allegedly existing or anticipated liability."
Although the case involved offset by the State of Washington rather than a financial institution and therefore was not factually identical, it appears the case has clarified the offset of shares that include social security deposits by a credit union is permissible. Additionally, the credit may have consensual lien rights in the member's deposit accounts, by virtue of language in the loan agreement that grants the credit union a security interest in those funds. Further, the credit union may rely on its common law right of set off, based on mutuality of debt (the credit union "owes" the member the money in his share draft account and the member owes the credit union the loan balance). Consult with your attorney before initiating such offsets.
It should be noted that Regulation Z prohibits statutory offsets against shares and deposits (including social security deposits) for credit card debts (However, a consensual pledge of shares for credit card debts may be made by the credit card applicant subject to specific restrictions on the format of the consensual pledge).
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