Unemployment benefits are protected from creditors and bankruptcy trustees in virtually all states. In 2009, the Missouri state courts emphasized a little-known protection of those assets, even after receipt.
In some cases, a payment to a debtor is protected more broadly prior to payment than after. For example, Missouri protects at least 75% of a person’s wages from garnishment by a creditor — at the source, the employer’s payroll office. But once the money is received by the debtor, the protection is much more limited, sometimes to only $600 in total cash or cash equivalents.
In the case of unemployment benefits, the right to those benefits are fully protected prior to payment. But in Capital One Bank v. Edison Credit Union the Court of Appeals for the Western District pointed out that this exemption also applies to the proceeds of unemployment benefits so long as they are in a segregated account used just for unemployment.
The Missouri law states:
Any assignment, pledge, or encumbrance of any rights to benefits which are or may become due or payable pursuant to this chapter shall be void; and such rights to benefits shall be exempt from levy, execution, attachment, or any other remedy whatsoever provided for the collection of debt; and benefits received by any individual, so long as they are not mingled with other funds of the recipient, shall be exempt from any remedy whatsoever for the collection of all debts except debts incurred for necessaries furnished to such individual or the individual’s spouse or dependents during the time such individual was unemployed. (emphasis added)
This is very similar to the federal provisions regarding Social Security benefits. So when getting by on either of these benefits and facing the collection action of creditors, or trying to protect your assets in bankruptcy, it pays to set up separate accounts for each kind of benefit you might be receiving.