Colorado's second-highest court has clarified the circumstances under which Social Security payments, which are exempt from garnishment under federal law, may actually be used to repay a debt.

On Thursday, a three-judge panel for the Court of Appeals disagreed that federal law "unambiguously" shields Social Security benefits from garnishment. Instead, a beneficiary who fails to separate Social Security payments from other income is obligated to pay their debt using the commingled money if tracing the source is not feasible.

"If the funds are not reasonably traceable, the funds are not exempt from garnishment," wrote Judge David J. Richman in the panel's Jan. 26 opinion.

The appellate court looked to decisions outside of Colorado interpreting the federal requirement that "none of the moneys paid" through Social Security are subject to garnishment. The purpose, according to the National Consumer Law Center, is to ensure a beneficiary has money to survive and to protect against impoverishment.

In 2015, Todd Wilson sustained an injury in his job as a vehicle repossession worker. He began receiving workers' compensation benefits from Pinnacol Assurance, but subsequently the U.S. Social Security Administration green-lit disability benefits for Wilson. In December 2019 and January 2020, Wilson received two Social Security payments in his checking account, totaling more than $56,000, covering the past several years.

Pinnacol attempted to recover a portion of Wilson's workers' compensation payments under state law, and an administrative law judge agreed Wilson owed Pinnacol nearly $23,000. Wilson argued in Denver District Court that the federal exemption applied to his Social Security payments, but then-Chief Judge Michael A. Martinez decided he "cannot reasonably trace the origin of these funds" in Wilson's various bank accounts. He ordered Wilson to repay Pinnacol.

On appeal, Wilson contended that Colorado's appellate courts had not adopted the "reasonably traceable" standard. Commingling Social Security payments with other money does not nullify the garnishment exemption in federal law, he maintained.

The appellate panel agreed conceptually that Social Security benefits are protected from creditors, even if they are mixed with other funds.

"But the rule is not absolute — if the recipient of social security benefits commingles the benefits with other funds, he is entitled to protection for those funds that are reasonably traceable to social security income," wrote Richman.

For Wilson, his Social Security payments moved between checking and savings accounts, which both contained other money. The panel declined to prescribe a method for tracing Social Security benefits, but concluded they were no longer reasonably traceable in Wilson's case.

Richman added the majority of state and federal courts have adopted the reasonably traceable standard, "and we see no reason to take a different tack."

The panel also found Wilson's child support bank account was not shielded from garnishment because it did not satisfy the requirements under state law.

"One of the standards for Colorado cases involving garnishments says that the court should be on the side of the debtor," said Roger Fraley, the attorney for Wilson. "I don't think the panel reviewing this case did that at all."

Wilson died while the case was on appeal and his mother, Patricia Laughlin, took his place in the litigation. Fraley said he is inclined to appeal the decision, but he has not yet received Laughlin's approval.

An attorney for Pinnacol did not immediately respond to an email asking if the insurer would continue seeking repayment in light of Wilson's death.

The case is Pinnacol v. Laughlin.