Court Holds Debtor Can Claim Exemption for over $14,000 in Health Savings Account

One of the most common issues that comes up in Kentucky bankruptcy cases is what constitutes an exemption under the bankruptcy code. A recent opinion from one state’s supreme court considered whether a debtor could claim an exemption for funds in his health savings account. In the case, the debtor claimed an exemption in his Chapter 7 bankruptcy claim for funds in his health savings account of $14,319.61. The trustee objected to the exemption, and the state’s supreme court considered the issue.

DoctorThe statute at issue stated that a debtor could claim an exemption for “disability or illness benefits” or for “benefits paid or payable for medical, surgical, or hospital care to the extent that they are used or will be used to pay for the care.” The statutes did not explicitly state whether health savings accounts specifically qualified under those definitions. The intent of this exemption and other exemptions is to prevent the debtor and dependents from becoming destitute.

The court held that a debtor can claim an exemption for a health savings account if it is used or will be used to pay for medical care as described in the statute. In this case, the debtor withdrew funds from the health savings account solely to pay for medical expenses. Therefore, the funds in his health savings account were exempted under the statute.

Health Savings Exemption

A law recently passed in Kentucky allows for an express exemption for health savings accounts under Kentucky state law. The statute, KRS 427.010, provides for exemptions for personal property and disposable earnings of individual debtors. It states:

The following personal property of an individual debtor resident in this state is exempt from execution, attachment, garnishment, distress or fee-bill: All household furnishings, jewelry, personal clothing and ornaments not to exceed three thousand dollars ($3,000) in value; tools, equipment and livestock, including poultry, of a person engaged in farming, not exceeding three thousand dollars ($3,000) in value; one (1) motor vehicle and its necessary accessories, including one (1) spare tire, not exceeding in the aggregate two thousand five hundred dollars ($2,500) in value; professionally prescribed health aids for the debtor, or a dependent of the debtor.

The recent amendment adds an exemption for “funds deposited in a health savings account as described in Section 223 of the Internal Revenue Code of 1986.” This means that debtors who claim exemptions under Kentucky law may be able to exempt funds in a health savings account. However, the exemptions a debtor can claim and the benefit of those exemptions depends on the debtor’s unique circumstances.

Contact a Bankruptcy Attorney

If you are considering bankruptcy, an understanding of exemptions is essential. A debtor’s ability to claim exemptions determines the debtor’s ability to keep his or her possessions. With a dedicated team of knowledgeable and experienced attorneys, Kruger & Schwartz will present you with personalized solutions that take your unique circumstances and long-term goals into consideration. We offer a variety of legal services to northern Kentucky and southern Indiana residents to help put you back in control of your financial situation. Call our office toll-free at 866-366-3328 to set up an appointment.

More Blog Posts:

Failure to List Home Results in Revocation of Discharge 15 Months Later, Kentucky Bankruptcy Lawyers Blog, published July 14, 2017.

Recent Case Determines Debtor’s Tax “Returns” Are Not Dischargeable Due to Late Filing, Kentucky Bankruptcy Lawyers Blog, published June 16, 2017.

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