Health and Other Savings Accounts in Bankruptcy

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Depending on where you live, you need to know the rules for bankruptcy exemptions- especially if you have unique accounts like a health savings account. First, however, it is important to note that these exemptions can vary by state. This means, for example, Illinois bankruptcy exemptions health savings accounts may be different than the exemptions for other states. 

Health Savings Accounts and Bankruptcy

When you file a chapter 7 bankruptcy, non-exempt assets have to be turned over.  This includes most savings accounts, except for retirement accounts in 401Ks or IRAs. So, what about health savings accounts? Also known as HSAs, a health savings account can be treated differently when you file for a bankruptcy.  

Unlike a flexible spending account, a health savings account allows the money that you put in it to accumulate interest and grow.  However, the main stipulation is that you have to have a high deductible health plan in order to open a health savings account.  While you can withdraw from your health savings account in order to pay for health expenses, you cannot transfer funds to or from your 401k or IRA into your health savings account and money from the account can be used only for medical expenses or you face tax penalties.

Is an HSA Exempt During a Bankruptcy?

The answer to this question all depends on the state in which you reside in as there is no federal exemption. In fact, under rules instituted by the Bush Administration, federal bankruptcy law clearly states that funds within a Health Savings Account are not necessarily exempt from bankruptcy proceedings.  However, the state of Texas and certain other states do allow for health savings accounts to be exempt from bankruptcy filed within the state. 

If health savings accounts are not a protected asset during bankruptcy, many people who file a chapter 7 bankruptcy will need to surrender the funds to their bankruptcy trustee.  

Getting Help

When you are filing chapter 7 bankruptcy, you will benefit from having an experienced bankruptcy attorney on your side. With a bankruptcy attorney, you will have a clearer idea regarding the bankruptcy policies of your state and how they are relevant to your health savings account. Your lawyer can also help you to decide if you are better off filing a chapter 13 instead of a chapter 7 based on the amount of debt and the amount of assets you may have in your possession at the time of filing.