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.
The 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.