Health Savings Accounts/Medical Savings Accounts now protected under state law

In 2018 the Minnesota legislature added an exemption to state law to protect health savings accounts (“HSA”) and medical savings accounts (MSA) up to $25,000.00 from creditors, other than divorce court/child support orders.

The new law, effective August 1, 2018 says that the following is exempt:

Subd. 26.Health savings accounts; medical savings accounts.

(a) All money held in a health savings account, as defined in the Internal Revenue Code of 1986, section 223(d), as amended, up to a present value of $25,000.

(b) All money held in a medical savings account, as defined in the Internal Revenue Code of 1986, section 220(d)(1), as amended, up to a present value of $25,000.

(c) The exemptions in paragraphs (a) and (b) do not apply pursuant to the division of marital assets under section 518.58, a surviving spouse benefit under section 518.581, and a support order under section 518A.53.

So, what is an HSA or an MSA?  To quote from the IRS definitions from Publication 969, which you can access at:  www.irs.gov

A Health Savings Account (HSA) is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. You must be an eligible individual to qualify for an HSA. No permission or authorization from the IRS is necessary to establish an HSA. You set up an HSA with a trustee. A qualified HSA trustee can be a bank, an insurance company, or anyone already approved by the IRS to be a trustee of individual retirement arrangements (IRAs) or Archer MSAs. The HSA can be established through a trustee that is different from your health plan provider. …

To be an eligible individual and qualify for an HSA, you must meet the following requirements. You are covered under a high deductible health plan (HDHP), described later, on the first day of the month. You have no other health coverage except what is permitted under Other health coverage, later. You aren’t enrolled in Medicare. You can’t be claimed as a dependent on someone else's 2017 tax return.

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Medical Savings Accounts an Archer MSA is a tax-exempt trust or custodial account that you set up with a U.S. financial institution (such as a bank or an insurance company) in which you can save money exclusively for future medical expenses.

To qualify for an Archer MSA, you must be either of the following. An employee (or the spouse of an employee) of a small employer (defined later) that maintains a self-only or family HDHP for you (or your spouse). A self-employed person (or the spouse of a self-employed person) who maintains a self-only or family HDHP. You can have no other health or Medicare coverage except what is permitted under Other health coverage, later. You must be an eligible individual on the first day of a given month to get an Archer MSA deduction for that month. If another taxpayer is entitled to claim an exemption for you, you can’t claim a deduction for an Archer MSA contribution. This is true even if the other person doesn’t actually claim your exemption.

I do not see a lot of people with this type of account, but for those who do have one it can be significant, and previously Minnesota law did not protect these accounts.  I am glad that law now protects these assets. This protection is not limited to bankruptcy cases; it is effective to protect these accounts, up to the dollar limit, whether or not you file bankruptcy.

If you have questions about this, or if you have other questions about what assets are protected from the claims of creditors, feel free to set up a mutually convenient time to meet and discuss.  You can reach my office at:  320-252-4473.

IS BANKRUPTCY A BAD THING?

You will often hear that “bankruptcy is bad”, or that “bankruptcy is a forever mistake”.   It is likely that the people who say bankruptcy is bad don’t understand the process.  Each bankruptcy case is a little different, and people chose bankruptcy for many different reasons, most of which are beyond their control.

Certainly, filing bankruptcy is not something to take lightly, but Congress created the bankruptcy law to help people get a fresh start on their finances. 

Medical bills are often cited as causing a large percentage of bankruptcies.  For many people, unexpectedly losing a job puts them into a financial tailspin.  And in the current farming environment, with such low commodity prices, farmers are being pushed into bankruptcy by their lenders.  And, unfortunately, marriages end in divorce, and the couple – who now have two apartments or houses on which to pay, with two utility bills, two of everything else, plus driving back and forth for visitation – cannot afford to pay their bills.

It is true that bankruptcy will be on your credit record for up to ten years.  However, I routinely see people who filed bankruptcy four years ago getting perfectly normal home loans to buy a house because they have been able to rebuild their credit. 

And, oddly enough, some creditors will offer you credit when you are just out of bankruptcy.  They figure that since will you not be able to file bankruptcy again (there is an eight-year period between filing Chapter 7 cases, less for Chapter 13) that it is reasonable to take a chance on you.

None of this means you should not pay your bills, if you are able to do so.  But if you cannot pay, the law gives you a way to deal with overwhelming debt.

Each person’s situation is different, which is why we sit down with you in person to discuss your options.  We do not charge for a short initial visit.  If you are in financial hot water, feel free to call for an appointment.

Debts which may not be discharged

     When you file bankruptcy, you usually want to get rid of your debts -- in bankruptcy parlance, to discharge them.

     In a fairly recent case, the United States Supreme Court considered whether a creditor could succeed in having the debt owed to it ruled not discharged if the person who owed the debt lied to incur it. The summary by the Supreme Court says:

Respondent R. Scott Appling fell behind on his bills owed to petitioner law firm Lamar, Archer & Cofrin, LLP, which threatened to withdraw representation and place a lien on its work product if Appling did not pay. Appling told Lamar that he could cover owed and future legal expenses with an expected tax refund, so Lamar agreed to continue representation. However, Appling used the refund, which was for much less than he had stated, for business expenses. When he met with Lamar again, he told the firm he was still waiting on the refund, so Lamar agreed to complete pending litigation. Appling never paid the final invoice, so Lamar sued him and obtained a judgment. ....
Because Appling's statements were not in writing, the court held, [the Bankruptcy Code]      § 523(a)(2)(B) did not bar him from discharging his debt to Lamar.

     Frankly, it is never good to lie to your creditors.  Doing so may convert a debt that you could discharge into a debt you cannot discharge, under the theory that you tried to hinder, delay, or defraud your creditor.  That sort of objection arises under a different section of the Bankruptcy Code ( § 727).

     But with regard to a particular debt, if you lie in writing about the debt the creditor could use that writing to have your debt not wiped out.

     MORAL:  Either don't say anything, or tell the truth!  

     (Your mom would probably say the same thing!)

Paying your kids college tuition may be a problem

Now we have a new reason to be concerned about parents helping their adult children when the parents have to file bankruptcy later.
In a recent case in Connecticut, a bankruptcy trustee sued a college to get back about $21,000.00 the college had been paid by the parents of a student.

The trustee claimed that this money was "a fraudulent conveyance", meaning that the parents did not get anything of financial value in return for paying their child's tuition.

The parent who paid submitted an affidavit, saying that she "made the payments to [the college] because she wanted to reduce the amount of debt that Jeremy would graduate with and because she wanted to fulfill her Expected Family Contribution, a federally-imposed formula that is applied in determining a student's eligibility for federal financial aid. The Debtor also believed that subsidizing Jeremy's college tuition would help Jeremy become financially self-sufficient, which, in turn, would ultimately result in a financial benefit to her because Jeremy would be less likely to rely upon her for housing, food and other costs and more likely to be in a position someday to provide financial support to her, if necessary."

The bankruptcy court found that "  ...the Court finds that the Debtor did not receive any legally cognizable value under these statutes in exchange for the Transfers and therefore could not have received reasonably equivalent value."

The risk, therefore, is that the college will have to pay to the parent's bankruptcy trustee the amount she paid for tuition.  It looks as though the trustee is "only" trying to go back two years.

At this stage the bankruptcy court is setting the matter for trial, ,so there may be a change.  

I do not have a citation for this case yet, but it can be found on Pacer at:  

Boscarino v. Bd. of Trs. Conn. State Univ. Sys. (In re Knight) (Bankr. Conn., 2017)

ARE YOUR WAGES BEING GARNISHED?

If you have been sued and have a judgment against you, it is likely that from time to time the judgment holder will try to garnish your wages.  The way it works is as follows:

At least once a year the creditor, or their attorney, is required to send you a form by which you can tell the judgment holder that your wages cannot be garnished.

The main reasons your wages cannot be garnished are that you presently receive (or within the prior six months have received) "government assistance based on need.  The most common forms of government assistance based on need are fuel assistance, Medical Assistance, or MinesotaCare. (Other things qualify, such as MFIP).  If you have qualify, you should return the form to the creditor which will entirely protect you from being garnished.

If you don't return the form, the creditor (or, usually, their attorney) sends a form to your employer that instructs your employer to take a portion of your wages.

The amount that can be taken by the creditor is the smaller of:

one-fourth of your "net"wages; or
the amount over $290 per week (40 times the federal minimum wage).

In this context, :"net wages" means:  total wages minus "amounts required by law to be withheld".  In English, that means wages minus taxes.

As an example, if you make $12 per hour for 40 hours per week, and if your taxes are 20% (FICA + federal + state), the math works out as follows:

$480.00 gross
    96.00 taxes
384.00   net

1/4 of $384 = $96
amount over $290 = $94.00

So, the creditor could take $94 from this paycheck.

A garnishment lasts for 70 days (10 weeks) from the date it is served on your employer.  The employer is required to set aside the garnished amount for 180 days.

The bankruptcy angle is this:  If, when you file bankruptcy, the creditor has received more than $600 within the previous 90 days, that amount is ordinary a preference, and can be recovered from the creditor.

If you are being garnished, feel free to contact my office at:  320-252-4473.

New Means test numbers

Back in 2005 Congress inserted a "means test" into the bankruptcy code.  
What this means is that when you file bankruptcy, we must add up your income from all sources (except Social Security payments and, arguably, unemployment compensation benefits) for the six months before the month in which your case is filed.  

We then multiply that number by two [really, that's how the formula works!] and compare that result to a chart which shows the "median income" for a household of your size in Minnesota.

The significance of this is that if your household income is over the applicable number, and if you file a chapter 13 case, you need to be in a five year plan; if your household income is under the applicable number, you can file a plan of as short as three years.  Additionally, if your income is over the means tests number, you must complete an additional "budget" based on IRS exemption numbers.

The Census Bureau periodically updates the number, and the new numbers have just been announced.

For cases filed April 1 2017, and for about six months thereafter, the numbers in Minnesota are as follows:

household of one person:  $52,785.00
household of two people  $70,889.00
household of three people:  $85,033.00
household of four people:  $101782.00

If there are more than four people in the household, add $8,400.00 per additional person.

For comparison, if your case was filed in April 2015 the numbers were:

household of one person:  $50,934.00
household of two people  $66,566.00
household of three people:  $81,044.00
household of four people:  $94,807.00

Prenda Law Attorney's Case Converted

A Minnesota attorney named Paul Hansmeier was "sort of famous" for being involved in a set of cases often called the Prenda Law cases.  The gist of those cases was that the Prenda Law Firm would threaten to sue person "X" for downloading copyrighted pornography, but would settle the case for a few thousand dollars.

According to that infallible resource, Wikipedia:

In the 2013 civil ruling, Prenda Law, and three named principals, John Steele, Paul Hansmeier, and Paul Duffy, were found to have undertaken vexatious litigation,^{[4]:FOF.5 p.4} identity theft,^{[4]:FOF.9 p.5} misrepresentation and calculated deception (including "fraudulent signature"),^{[4]:FOF.6 p.4, FOF.9–11 p.5, p.6–8} professional misconduct and to have shown moral turpitude.^[4]:p.10 The principals were also deemed to have founded and been the de facto owners and officers of the shell company plaintiff and their alleged "client", created in order to "give an appearance of legitimacy".^{[4]
(accessed by me on Dec. 5, 2015).}

Mr. Hansmeier was ordered to pay a lot of financial sanctions on account of those cases. There are a lot more interesting facts, including that he recently started suing businesses here in Minnesota for violations of disability access laws.  This year he filed a chapter 13 bankruptcy here in Minnesota and promptly ran into a buzzsaw.  The United States Trustee (a part of the Department of Justice) brought a motion to convert his case to a chapter 7.  Their motion says, in part:

For the reasons stated in the motion to convert, the United States Trustee believes that the debtor’s chapter 13 plan cannot be confirmed. Specifically,it appears thatthe proposed plan does not comply with § 1322(a)(1),pays unsecured creditors an amount that is less than the amount that would be paid if the debtor’s estate was liquidated in chapter 7, was not proposed in good faith under 11U.S.C.§1325(a)(3), and the debtor does not have an ability to make payments under 11 U.S.C. § 1325(a)(6). In addition, the petition was not filed in good faith under 11 U.S.C.§1325(a)(7).

This week Judge Kathleen Sanberg granted the motion and converted the case to a chapter 7.  The case will play out in the bankruptcy court (case number 15:42460) and we will see what happens to Mr. Hansmeier.