There’s some common confusion about prepaid debit cards and bankruptcy judgments. But can debt collectors take money from prepaid cards? What If the Court decides in favor of the creditor, what can a debt collector garnish? Can a prepaid card be garnished? Can they include your Starbucks or Amazon card? Today having many prepaid cards is common even for people who already have bank debit and credit cards.
But, having prepaid cards created confusion in terms of garnishment. If you don’t know which type of prepaid card can be garnished, debt collectors can trick you into submission. This article will provide you the information you need. And ultimately, it will answer the question, “can debt collectors take money from prepaid cards?”
Very briefly, the cards that can be garnished by a debt collector include bank-issued prepaid cards and open-looped prepaid cards linked to your Social Security Number (SSN). The key factor is whether a debt collector can find your prepaid card in a credit report – if they can, then it is garnishable. And not if they cannot.
But first, it is useful to know the definition of a prepaid card. Then, you’ll briefly see the types of prepaid cards and some examples of them. After learning these things, you’ll see which type of prepaid card can and cannot be garnished by debt collectors.
What Is a Prepaid Card?
There’s a lot of confusion about the definition of a prepaid card. However, the Federal Trade Commission (FTC) defines a prepaid card as a card you use to pay for your purchases and something you buy with a stored value in it in dollars.
You can think of a prepaid card simply as a card with a preloaded value in it. It means that a prepaid card will be useless if it has a zero balance. Many people use prepaid cards to avoid bringing cash with them. It also provides convenience in paying for your purchases.
In the next section, you’ll learn about the types of prepaid cards and how they differ from each other. Knowing the different types of prepaid cards will help you understand which can be garnished by debt collectors and as such, we have gone into quite a bit of detail about each type to help this understanding.
Types of Prepaid Cards
There are different types of prepaid cards. This section will dive deeper into the nature of each prepaid card type. And perhaps, you’ll realize that you have these cards in your pocket right now.
1. Bank-issued Prepaid Cards
Aside from standard debit cards, banks also issue prepaid cards. These are alternative cards because they’re not connected to any bank account. Unlike debit cards, availing of a prepaid debit card from banks does not require a bank account. However, you can connect your prepaid card to an existing bank account.
A unique feature about bank-issued prepaid cards is that you can only reload it in the issuer bank. It’s like a “pay before, use later” system wherein you are required to load a certain amount in the card before using it for purchases. However, the major advantage of prepaid debit cards is that it does not have strict regulations like debit cards.
Advantages of Bank-issued Prepaid Cards
- There are no minimum monthly deposit balance requirements.
- It is useful for cash budgeting and management.
- It works like a debit card for purchases.
- It doesn’t affect your credit rating.
Disadvantages of Bank-issued Prepaid Cards
- There are monthly fees for continued use.
- They don’t earn interest on their outstanding balance.
- Third-party bank ATMs may charge higher withdrawal fees.
- There might be limits on withdrawal amounts.
Examples of Bank-issued Prepaid Cards
- American Express Serve®
- American Express Serve® FREE Reloads
- American Express Serve® Cash Back
- Bluebird® American Express® Prepaid Debit Account
2. Open-looped Prepaid Cards
An open-looped prepaid card means that it’s a card that can be reloaded, accessed, and used in multiple establishments. And more importantly, they are not linked or issued by any banking or financial institutions. You can also call this card a “stored-value card” because it stores a “prepaid” value.
Like bank-issued prepaid cards, open-looped cards need to be loaded before using them. However, there are also open-looped cards that are non-reloadable (e.g., Visa Gift Cards). The advantage of open-looped cards over bank-issued ones is that you can reload the former card on multiple channels, including from your bank account. In other words, it is not exclusive to a particular institution. Instead, it integrates with third-party providers to provide improved accessibility to its users.
Advantages of Open-looped Prepaid Cards
- It doesn’t require a bank account or a bank account application.
- It’s an alternative for people without bank accounts (e.g., teenagers).
- It can access multiple payment channels.
- Users can use banks and nonbank channels to reload this card.
Disadvantages of Open-looped Prepaid Cards
- There are monthly fees for continued use.
- They don’t earn interest on their outstanding balance.
- It is valid only for a certain period.
Examples of Open-looped Prepaid Cards
- Visa Prepaid Cards
- Netspend Prepaid Mastercard
- PayPal Prepaid Mastercard
- Revolut
3. Closed Prepaid Cards
When you buy a card that's exclusive only to a particular establishment, that card is called a “closed prepaid card.” You can only use this card at the issuing company’s business. Having this card is like a prepayment for purchasing the products of the issuing company. People buy this kind of card for convenience, especially if they frequently patronize the business.
Closed prepaid cards can be reloadable or non-reloadable. Also, the issuing company may impose a cash value on the card. A closed prepaid card that's non-reloadable has a fixed cash value (e.g., $100 card, $500 card, $1,000 card). Once you spend the card's value, you cannot add any more value to it.
Moreover, some establishments impose strict cash value limits on closed prepaid cards. For example, Starbucks doesn't allow you to have more than $500 stored in your card. Moreover, they also don't allow more than $2,000 of top-ups on all your Starbucks Cards per day. This policy of Starbucks is the best example of a reloadable card with cash value.
Advantages of Closed Prepaid Cards
- It has an easy registration process.
- It is usually part of the issuing company's rewards or loyalty program.
Disadvantages of Closed Prepaid Cards
- It can only be used for one establishment.
- There may be cash-in limits.
Examples of Closed Prepaid Cards
- Starbucks Card
- Store Gift Cards
- Restaurant Gift Cards
4. Semi-closed Prepaid Cards
Semi-closed Prepaid cards share the same characteristic as closed prepaid cards. However, you can use them only in select establishments. When you have a semi-closed prepaid card, you can use it in participating stores. An example of a semi-closed prepaid card is the Walmart MoneyCard. While you can use this card at Walmart, you can also use it at stores that accept Mastercard.
I Have Several Prepaid Cards. What Can Debt Collectors Garnish?
You must've checked your wallet when you learned about different prepaid card types. And, it probably made you wonder. Which of these cards can be garnished? First, here's some good news. Not all of the prepaid cards mentioned above can be garnished. Thus, here's the answer to the question in the title.
Garnishable Prepaid Cards
A garnishable prepaid card's key feature is its link to any bank or a financial institution regulated by the Federal Government. So, the cards below can be a target during debt collection:
- Bank-issued Prepaid Cards. Since these cards are linked to a savings or checking account, debt collectors can easily find this card in your credit report. If you don't withdraw your money from these prepaid cards in time, it might be too late to do that if the creditor gets a favorable judgment from the Court.
- Open-looped Prepaid Cards Linked to Social Security Number (SSN). In general, creditors can't garnish a Visa or Mastercard prepaid card. But, they can if they know it exists. How? Ask yourself first. Is this card linked to your SSN? If yes, debt collectors may find it and garnish it.
Non-Garnishable Prepaid Cards
- Store Gift Cards. So, you happen to have $300 worth of physical gift cards coming from different stores. Let's say you have 10 x $10 physical gift cards from Barnes & Noble. Can debt collectors garnish them? Well, the plain answer is no because they're prepaid and applicable only to a specific store.
- Open-looped Prepaid Cards Not Linked to SSN. You have a Visa prepaid card in your pocket right now, and you're confident that it's not linked to any bank account or SSN. If that's the case, don't tell the creditors about it because if you did, they can garnish it.
- Reloadable Closed or Semi-closed Prepaid Cards. Do you think a Starbucks card can settle your debt? The answer is yes if the debt collectors would consider a Venti Americano as payment. But if not, your Starbucks or Walmart card is immune to garnishment.
Protecting Yourself From Garnishment
Debt collectors would want to garnish as much as possible, especially if they know that you have the best prepaid cards like Visa, Netspend, or Mastercard. However, you can protect yourself from garnishment by following the tips below:
- Withdraw money from your bank accounts before the Court decides on your case. But, take note that this money should be used only for necessary expenses (e.g., groceries, food, gas, etc). So if ever you lose, your money for necessary expenses is safe from garnishment.
- Keep your transactions prepaid or in cash. Purchase a Walmart card and put a decent amount of money there.
- Don't tell them about these cards. Again, creditors can't garnish things that they don't know. Let them garnish your wage or bank account. But, never tell them about your Visa or Walmart card.
If you want a legal perspective on this topic, check out this website.
Final Words
The answer to the question, “can debt collectors take money from prepaid cards?” lies in the type of prepaid card you have. If they are shown on your credit report, they can garnish it. If it is not, they cannot.
Using prepaid cards to avoid garnishment can be a smart way to keep up with your finances, especially in times of financial distress. But now that you know which prepaid card can or cannot be garnished, you'll have an advantage over the persistent debt collectors.
Aidan has been writing about personal finance for over 6 years. Prior to this, he worked as a Corporate Finance Analyst where he specialized in Due Diligence, Company Valuations and more. He is a CFA charterholder.
