What Happens to HSA Funds in a Chapter 7 Bankruptcy?

Many Americans rely on a health savings account (HSA) to help address their medical costs. An HSA allows participants in high-deductible insurance plans to accumulate money that can cover various medical expenses. These accounts are portable and do not expire at the end of the year. When HSA funds are used for qualified expenses, they typically are not taxed. 

If you have an HSA but are facing serious debt problems, you might be concerned about what happens to the money in your account once you file for bankruptcy. When someone seeks bankruptcy protection, most of their property becomes part of the bankruptcy estate under federal law. A trustee in a Chapter 7 case can liquidate non-exempt assets to pay unsecured creditors. 

Approximately a decade ago, the Georgia Supreme Court addressed this issue in Mooney v. Webster. The case questioned whether funds in an HSA account qualified for a bankruptcy exemption under state law. Though exemptions exist for disability, illness, pension and unemployment benefits, the court found that an HSA does not fall into any one of these categories. Accordingly, monies in an HSA become part of the bankruptcy estate and can be distributed among creditors in a Chapter 7 proceeding.  

Ms. Mooney, whose HSA balance exceeded $17,000, argued that the account constituted an illness benefit that would be shielded from the bankruptcy estate. However, the court disagreed, noting that HSA funds can be used for a wide range of healthcare costs not related to an illness, such as expenses for prevention and diagnostic services. Another distinction noted by the court was that the exempted benefits substitute for wages while HSA funds do not. 

Georgians considering bankruptcy must carefully review their specific circumstances with a qualified attorney, who can analyze which exemptions are available in their situation. Given that HSA accounts are not shielded in a Chapter 7 liquidation, someone who has a substantial balance in one might want to consider a Chapter 13 repayment plan. There, HSA assets are assessed as part of the debtor’s overall financial picture. It is possible that a plan can be structured to preserve funds needed for medical expenses. Another option is filing under Chapter 7 and protecting HSA funds through state’s wildcard exemption, which is $1,200 plus up to $10,000 of an unused homestead exemption. 

Jeff Field & Associates advises Georgia residents on a full range of bankruptcy issues, including relevant exemptions. Please call 404-381-1278 or contact us online to schedule a consultation. Our offices are in Douglasville, Gainesville, Bogart, Lawrenceville, Marietta and Decatur.