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- Health Savings Accounts Should Be Fully Exempt in Bankruptcy from the Reach of Creditors
- Health Savings Accounts Should Only Be Partially Exempted in Bankruptcy to Balance the Debtor's Fresh Start with the Creditors' Equitable Recovery
Health Savings Accounts in Bankruptcy: Full Protection or a Partial Exemption?
The July 2026 ABI Journal features an interesting Consumer Point/Counterpoint debate over whether Health Savings Accounts (HSAs) should receive a federal bankruptcy exemption and, if so, how broad that exemption should be. Both authors begin from the same premise: unlike retirement accounts, HSAs currently lack a specific federal bankruptcy exemption, leaving debtors in many jurisdictions vulnerable to losing funds intended for future medical expenses. From there, however, the articles take sharply different approaches.
Summary:
Professor Michael D. Sousa argues that HSAs should be fully exempt from the claims of bankruptcy trustees and creditors. He notes that HSAs were created exclusively to pay qualified medical expenses and that millions of Americans increasingly rely upon them as health care shifts toward high-deductible insurance plans. Although critics often portray HSAs as tax shelters for wealthier households, Sousa points out that the overwhelming majority of HSA accounts contain relatively modest balances. According to data cited in the article, approximately 91% of HSAs hold less than $10,000, providing little more than a cushion against unexpected medical expenses rather than serving as investment vehicles.
Sousa further observes that while retirement accounts receive extensive federal bankruptcy protection, debtors attempting to exempt HSAs have generally been unsuccessful under existing exemption statutes. As a result, many lower- and middle-income debtors risk losing funds specifically intended to pay future medical expenses just as bankruptcy is supposed to provide them with a meaningful fresh start. He therefore advocates amending either the Bankruptcy Code or the Internal Revenue Code to place HSAs on essentially the same footing as retirement accounts.
Lauren Alexis Whitley reaches a different conclusion. She agrees that HSAs deserve protection but argues that full exemptions disproportionately benefit higher-income individuals who are more likely to accumulate substantial HSA balances and use the accounts as investment vehicles. Instead, she proposes a sliding-scale exemption tied to the debtor's federal income tax bracket. Under her proposal, lower-income debtors would receive a full exemption, while debtors in progressively higher tax brackets would receive exemptions of 75%, 50%, 25%, or ultimately none at all.
Whitley also recommends two additional safeguards. First, higher-income debtors could seek additional protection by demonstrating "special circumstances" showing a need to preserve larger HSA balances for anticipated medical expenses. Second, she proposes a six-month lookback period under which HSA withdrawals used for non-qualified purposes before bankruptcy could be recovered for the benefit of the estate, analogous to certain existing Bankruptcy Code lookback provisions.
Commentary:
Both authors make a persuasive case that the current treatment of HSAs under the Bankruptcy Code deserves attention. It is difficult to explain why retirement accounts receive comprehensive protection while money specifically earmarked for future medical expenses often does not. Medical debt remains one of the leading causes of financial distress, and stripping debtors of funds intended to pay for future health care can undermine the very fresh start bankruptcy is intended to provide.
That said, the proposed income-tax-bracket approach strikes me as considerably more complicated—and frankly more unkind—than is either necessary or appropriate.
One of the fundamental compromises of the Bankruptcy Code already exists in the Means Test. Higher-income debtors frequently must devote additional disposable income to unsecured creditors through Chapter 13 plans or may even be steered away from Chapter 7 altogether. In other words, Congress has already decided that a debtor's income should affect what creditors receive. Layering a second form of "means testing" onto exemptions themselves risks adding complexity without producing any corresponding improvement in fairness.
Perhaps more importantly, exemptions have historically enjoyed broad political support precisely because they generally apply equally to all debtors. Once Congress begins dividing debtors into those who "deserve" protection and those who do not based upon income, support for the exemption itself becomes easier to erode over time. A simple, uniform exemption is easier to administer, easier to explain, and ultimately more durable politically than a graduated exemption requiring courts and trustees to calculate varying percentages based on tax brackets.
The proposal for a six-month clawback of allegedly improper HSA withdrawals likewise raises practical concerns.
First, the Internal Revenue Code already imposes meaningful tax consequences and penalties when HSA funds are used for non-qualified expenses. Those existing penalties are designed to discourage abuse, and there is little evidence that misuse of HSAs before bankruptcy is sufficiently widespread to justify creating another layer of bankruptcy litigation.
Second, such a provision would inevitably increase administrative costs. Trustees would have reason to examine HSA transactions in virtually every case involving an HSA, requiring debtors to document medical expenditures, respond to additional inquiries, and potentially litigate relatively modest sums. That sort of routine examination would impose costs not only on debtors, but on Chapter 7 trustees as well, consuming time and resources that could be better spent administering cases involving far more significant assets. For many consumer debtors, the costs of investigating these issues could easily exceed any recovery.
Finally, the proposal assumes that debtors who spent HSA funds for non-qualified purposes before filing would actually have the financial ability to reimburse the bankruptcy estate. In many cases, the very reason those funds were withdrawn was financial distress. Creating an obligation to repay money that has already been spent may generate litigation without producing meaningful distributions to unsecured creditors.
Whether Congress should create a federal HSA exemption is a perfectly appropriate subject for academic debate. Whether Congress will revisit bankruptcy exemptions in a thoughtful, balanced, and consumer-friendly manner is another question entirely. Recent history provides little reason for optimism. Indeed, if Congress ever does reopen the Bankruptcy Code's exemption provisions, consumer advocates should be prepared not only for proposals that expand protections, but also for efforts to narrow or condition long-standing exemptions. Given today's political climate, there is at least as much reason to fear what else might be added to such legislation as there is to hope for a new HSA exemption. Sometimes leaving a stable compromise alone is preferable to inviting a broader legislative rewrite.
If Congress nevertheless chooses to act, it should resist the temptation to solve every perceived inequity with another exception, another formula, another means test, or another evidentiary hearing. Bankruptcy already has enough complexity. Protecting modest medical savings should be straightforward—not another battleground in already expensive consumer bankruptcy cases.
On balance, a simple, full federal exemption would better advance the Bankruptcy Code's goal of providing an effective fresh start while avoiding yet another layer of litigation, factual disputes, and administrative expense. Sometimes the best reform is also the simplest one.
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