Updated May 20, 2016
If you have money set aside in a Health Savings Account (HSA) or Medical Savings Account (MSA) and file for Chapter 7 bankruptcy, that money most likely will become part of your bankruptcy estate. If you cannot exempt the funds, then your Chapter 7 bankruptcy trustee can take the money in the accounts and use them to repay unsecured creditors.
Whether your MSA or HSA funds are at risk depends on whether:
(To learn more about what happens to your property and assets in Chapter 7 bankruptcy, visit the Your Property in Chapter 7 Bankruptcy topic area.)
An HSA is a tax-exempt account that allows account holders to use employer contributions and earnings to pay future medical expenses. In order to establish an HSA, you must be enrolled in a high deductible health plan.
Like an HSA, an MSA is a tax-exempt account that allows account holders covered by a high-deductible health plan to save for future medical expenses. You can no longer contribute to an MSA, but some people still have accounts with funds they contributed before MSAs became obsolete.
(Learn more about HSAs and MSAs.)
When you file for Chapter 7 bankruptcy, the income and assets that you own and possess before you file become part of your bankruptcy estate. There are a few exceptions to this rule, for example, most ERISA retirement accounts and certain educational savings accounts are not part of your bankruptcy estate. (To learn more, see Property in Your Bankruptcy Estate.)
If property is part of your estate, the bankruptcy trustee can administer the property as he or she sees fit. This often means selling the property and using the proceeds to repay unsecured creditors.
In a recent case, the Bankruptcy Appellate Panel of the
Eighth Circuit ruled that HSA funds are part of the bankruptcy estate.
In re Leitch, 494 BR 918 (B.A.P. 8th Cir. July 16, 2013).
In that case, the debtor pointed to the section of the bankruptcy code which states that funds withheld by an employer for contributions to a health insurance plan are not part of the bankruptcy estate. He argued that HSAs are health insurance plans. The court disagreed, stating that an HSA is a trust account, not an insurance plan. Because the account holder may use the funds for any purpose ( although the tax-advantage is lost if not used to pay for health care expenses) it is essentially a “tax-preferred place to park money for use in paying health care expenses.”
Not many other courts have ruled on this particular issue. However, it is likely that other courts will rule similarly – that HSA and MSA funds are part of the bankruptcy estate. Consult with a local bankruptcy attorney if you don’t live within the 8th Circuit. (States in the 8th Circuit include Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota.)
Even if the money in your accounts are part of your bankruptcy estate, you may still keep them if they are exempt.
Each state has a list of property that is “exempt” -- meaning it is safe from the reaches of the bankruptcy trustee. There is also a set of federal bankruptcy exemptions. Most states require debtors to use the state system of exemptions, but a few states allow bankruptcy filers to use the federal exemptions.
In In re Leitch the Eighth Circuit Bankruptcy Appellate Panel ruled that the federal bankruptcy exemptions do not cover HSA and MSA funds. It’s possible that another Court of Appeals will rule differently.
However, the federal bankruptcy exemptions do have a wildcard exemption, which you can apply to any type of property. This means that if you use the federal exemptions in your Chapter 7 case, your only avenue to protect HSA funds is by way of the federal wildcard.
(To find out if you can use the federal exemptions, and for a list of those exemptions, see The Federal Bankruptcy Exemptions.)
Although not common, there are a few states that provide a specific exemption for money held in a HSA or MSA. For example, you can protect HSA and MSAs in Florida, Mississippi, Oregon, Tennessee, Texas, and Virginia. There may be other states that protect these funds as well.
If your state does not have an exemption specific to HSAs or MSAs, you may be able to use a wildcard exemption to protect all or part of the money.
To find the exemptions in your state, visit our Bankruptcy Exemptions by State topic page.