Summary: Effective February 23, 2011, federal regulations may have settled the question about whether federal benefits, including Social Security and VA benefits, that are exempt from garnishment or execution by judgment creditors and bankruptcy trustees retain that exempt status if commingled with other non-exempt funds. 31 C.F.R. § 212.3 applies to garnishment, which is defined to include “execution, levy, attachment, garnishment or other legal process” (Emphasis added), which should include actions by a bankruptcy trustee. Under this regulation, the burden of determining if a bank account is subject to garnishment falls on the financial institution holding the bank account. It must determine how much of any federal benefits in the account constitute a “protected amount”, defined as the lesser of the sum of all benefit payments posted to an account during the preceding two months, or the balance in an account when the account review is performed. Pursuant to 31 C.F.R. § 218.8, this “protected amount” does not limit the amount exempted from collection, but merely defines amounts that are protected even if commingled. Commentary: The regulation give several useful examples for understanding its application, but in general for bankruptcy purposes this will mean that all exempt federal benefits received, even lump sum amounts, within the preceding two months of the bankruptcy filing retain their exempt nature even if commingled with other funds. So while the safest practice may still be to segregate federal benefits into separate accounts, the failure to do so should not be fatal to the exemption. This does not apply, however, to benefits paid under state law, such as unemployment, which pursuant to N.C.G.S. § 96-17(c) specifically lose their exempt status “so long as they are not mingled with other funds of the recipient.” The absence of this phrase in other North Carolina benefit exemption statutes, such as in N.C.G.S. § 97-21, which provides an unlimited exemption for Workers Compensation benefits, should indicate that commingle of funds other than unemployment is not fatal to the exemption. Additionally, this regulation would call into question the practice by Wells Fargo Bank of freezing accounts following the filing of a Chapter 7 bankruptcy, particularly if the account includes federal benefits. For a copy of the regulation, please see: 31 C.F.R. § 212 et seq.