HSAs Exempt in Bankruptcy, Montana Supreme Court Rules

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By Daniel Gill

Health Savings Accounts can be claimed as exempt in bankruptcy, the Supreme Court of Montana ruled ( In re Giacometto , 2017 BL 225659, Mont., No. OP 16-0709, 6/29/17 ).

The opinion by Chief Justice Mike McGrath stressed that exemptions in Montana are required by its constitution to be construed liberally in favor of debtors.

John Charles Giacometto filed a Chapter 11 bankruptcy case on Jan. 22, 2016, and the case was converted to Chapter 7 on July 22, 2016.

In Chapter 7, a debtor’s assets are liquidated by a trustee for the benefit of creditors. However, federal and state laws allow debtors to exempt certain property interests from the bankruptcy estate which would otherwise fall under the control of the trustee.

Here, the debtor tried to claim as exempt about $14,000 he held in a Health Savings Account pursuant to Montana law. Montana is one of the states which has elected to opt out of the exemptions set forth in the bankruptcy code. The trustee objected to the claimed exemption.

Not finding any Montana appellate decisions answering whether HSAs could be claimed as exempt, the bankruptcy court asked the Montana Supreme court to weigh in.

The state high court found that state laws allowing a debtor to exempt “disability or illness benefits” and “benefits paid or payable for medical, surgical, or hospital care” would apply to HSAs, at least “to the extent that they are used or will be used to pay for the care.”

It found further support for its rulings in a recent amendment enacted by the Montana legislature that expressly added contributions to health and medical savings accounts to the lists of exemptions available in the state.

Justice Jim Rice dissented. He argued that because debtors could technically use HSA funds for non-medical purposes, albeit with certain penalties, they shouldn’t be exempt under the statute. He also said that the fact that the legislature created the new amendment reflected that the former law didn’t include HSAs.

The Chapter 7 trustee, Joseph V. Womack, Billings, Mont., represented himself. Giacometto was represented by James A. Patten, Billings, Mont.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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