piggy bank stethoscope istockIf you file for Chapter 7 bankruptcy and have money left in your health savings account (HSA) or medical savings account (MSA) you may be wondering if you have to turn them over to the bankruptcy trustee. There are not many published court decisions on the answer to this question. But we do know that it will depend on where you file for bankruptcy and whether your state has an exemption for HSA or MSA funds. A new case from the Eighth Circuit sheds some light on how your court may rule.

Keeping Assets in Chapter 7 Bankruptcy

When you file for bankruptcy, most of your property becomes part of your bankruptcy estate. Your bankruptcy trustee has control over that property and can sell it for the benefit of your unsecured creditors.  Not all property is part of your bankruptcy estate, however. Bankruptcy law makes some exceptions. (To learn about those exceptions, see Property Not in Your Bankruptcy Estate.)

However, both federal and state laws list items of property that are “exempt” or safe from the trustee.  (Learn more about bankruptcy exemptions.)

Whether you can keep your HSA or MSA funds depends on:

  • whether the money is part of your bankruptcy estate (that is, does it fall within one of the exceptions), and
  • if it is part of the estate, whether you can exempt the funds.

Recent Eight Circuit Case: Cannot Keep HSA Money If You Use Federal Bankruptcy Exemptions

A recent decision by a Bankruptcy Appellate Panel of the Eighth Circuit Court of Appeals ruled on just this issue.

In that case, In re Leitch,  __ BR__  (B.A.P. 8th Cir. July 16, 2013), the court determined two things:

  • Health savings account funds are included in the bankruptcy estate. In so ruling, the court rejected the bankruptcy debtor’s argument that the funds were a health insurance policy and therefore not part of the bankruptcy estate under that exception.
  • Health savings account funds are not exempted in the federal bankruptcy exemption scheme. The debtor in this case opted to use the federal bankruptcy exemptions. The court rules that HSAs and MSAs are not exempt in the federal scheme.

To learn more about this case and the issue in general, see Nolo’s article Can I Keep HSA or MSA Funds in Chapter 7 Bankruptcy?

Are Your HSA or MSA Funds Safe in Chapter 7 Bankruptcy?

If you don’t live within the Eighth Circuit (Eighth Circuit states include Arkansas, Iowa, Minnesota, Missouri, Nebraska, North Dakota, and South Dakota), it’s possible, but not likely, that your court will decide that HSA funds are not part of your bankruptcy estate. Check with a local bankruptcy attorney.

You may be able to keep your HSA money, however, if your state exempts those types of funds. At least six states specifically exempt health savings account money in Chapter 7 bankruptcy:  Florida, Mississippi, Oregon, Tennessee, Texas, and Virginia. And if your state does not have an HSA exemption, you can use any available wildcard exemption. (Learn more about wildcard exemptions in bankruptcy.)