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Can You Expect Your Health Savings Account in Bankruptcy?

Of the various different types of bankruptcies, Chapter 7 tends to be the most common as well as the simplest. Specifically, it's characterized by a trustee selling off assets not protected by exemption in an effort to settle debts with creditors. Under terms of Chapter 7 bankruptcy, a debtor can claim certain things as exempt, such as cars, property or other valuable belongings that might otherwise be sold to settle all of or parts of the total debt. Nonexempt property is everything that isn't classified as, or marked as, exempt.

Noting this, many people file for Chapter 7 bankruptcy in an effort to get out from under hefty credit card debt, medical debt or even personal loans, as it's typically quick and the least complicated of all bankruptcy filings. While individuals are permitted to classify certain assets as exempt, they won't have to worry about anything happening to their IRAs or ERISAs, for instance, as those are already protected according to federal regulations. Health savings accounts, or HSAs, are another story. This is largely because federal law does not specifically exempt HSA accounts, meaning that this is more of an issue on a state-by-state basis. In Tennessee, however, Chapter 7 filers should know that HSA accounts can be exempt from proceedings.

HSAs Explained

What exactly are Health Savings Accounts, often referred to as HSA? They're accounts that individuals can set up to allocate pre-tax dollars as a means of putting toward future medical expenses that aren't covered by their medical insurance plan. They are most popular among self-employed business owners or independent contractors who might not otherwise have access to affordable full-coverage health insurance.

In 2016, the federal government set a total HSA contribution limit of $3,350 for individuals and $6,750 for families. Even those with no health insurance plan can still open an HSA and allocate funds to it.

One nice thing about HSAs is that funds carry over from year to year. This is a key difference between the HSA and Flexible Savings Accoutns, or FSA. With an FSA, any unused funds go to the government if they've not used for eligible medical expenses throughout the calendar year. 

Because of the HSA carryover rule, some individuals may accumulate many thousands of dollars in their accounts over the years, which may make them an attractive source for bankruptcy trustees to tap for settling debts in Chapter 7.

HSAs and Chapter 7 Bankruptcy Exemptions In Tennessee

As we noted in the opening, you're permitted to claim certain exemptions when you file for Chapter 7 bankruptcy, while other assets are already exempt by federal regulations. The federal government hasn't set nationwide exemption guidelines for HSAs, so these accounts are considered more on a state-by-state basis based on whether debtors will be able to claim these as exempt when filing. Certain states - take Idaho for instance - won't allow Chapter 7 bankruptcy filers to protect their HSA accounts. Other states, including Tennessee, allow debtors to mark their HSA accounts exempt. However, even in states where HSAs are permitted to be listed as exempt, it's still important for the debtor to claim the exemption accordingly upon filing.

Make Sure Your Bankrupty Attorney Claims Exemptions

While filing for Chapter 7 bankruptcy tends to be a simpler, faster process, it's not without its complications - and one of these complications can be HSAs and whether or not they're able to be listed as exempt. The good news for Tennessee residents is that HSAs can be listed as exempt, so long as you claim it accordingly. For more information on Chapter 7 bankruptcy and HSAs, contact us today.

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Rothschild & Ausbrooks, PLLC
1222 16th Avenue South, Suite 12
Nashville, TN 37212

Toll Free: 866-656-8909
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Nashville Bankruptcy Office