by the Phoenix Arizona bankruptcy lawyers at Ariano & Reppucci, PLLC
When you declare bankruptcy it means that your debts have piled up and creditors are almost knocking at your door. You can choose between a liquidation bankruptcy (Chapter 7) and a repayment plan bankruptcy (Chapter 13) depending on your situation. You will need to list out your non-exempt assets on your bankruptcy schedule for the bankruptcy type you qualify for so the bankruptcy trustee can help you pay back creditors in a way you can afford.
Everyone dreams about winning the lottery, but in a time when debts are piling up it could greatly affect your bankruptcy.
Can I keep my lottery winnings if I win in the middle of bankruptcy?
The answer to this question depends on when you bought your lottery ticket and under which chapter you filed your bankruptcy petition.
A Chapter 13 bankruptcy lasts longer than a Chapter 7 (about three to five years) because you create a court-approved repayment plan to pay back your debts. Unfortunately, any lottery winnings will usually go into the bankruptcy estate and will be used to pay back creditors.1 Basically, your repayment plan restructures the amount you will have to pay back your creditors over several years. Depending on how your repayment plan is structured, you will repay a portion to all of your debt interest-free and the unpaid remaining balance which is outside of your plan is discharged in full.2 If you win the lottery, then a lot depends on how your plan was drafted. However, it is likely that the winnings will be added to your bankruptcy estate.3 You could also dismiss your bankruptcy and use your lottery winnings to pay back creditors as well.4
A Chapter 7 bankruptcy is a liquidation bankruptcy. Unlike a Chapter 13 bankruptcy, your debts are wiped out at a much faster rate. However, you have to list all your non-exempt property and include it in the bankruptcy estate so the bankruptcy trustee can pay off creditors. If you buy a lottery ticket before filing for bankruptcy, it will be part of the bankruptcy estate.5 If you buy a lottery ticket after filing for bankruptcy, then you will need to contact your lawyer immediately to let him or her know that you may have a potential windfall.
Other issues related to Chapter 7 bankruptcy and winning the lottery include the means test. You need to pass the “means test” to qualify for a chapter 7 bankruptcy. This means that your income must be below a threshold amount. For example, if you are a single earner then the median family income is $42,107 and if you are a two person earning household the income is $55,118.6 If you win the lottery before filing for bankruptcy, this could take your income well above the amount required for you to pass the means test. Thus, you will probably have to file under Chapter 13.
 What Happens If I Win The Lottery While In Bankruptcy?, bankruptcytruth.com, http://www.bankruptcytruth.com/minnesota-bankruptcy-information/what-happens-if-i-win-lottery-while-bankruptcy (last visited Dec. 9, 2014).
2 John Hilla, What Happens If I Win The Lottery While In Chapter 13 Bankruptcy?, hillalaw.com (Mar. 15, 2014), http://hillalaw.com/happens-win-the-lottery-while-in-chapter-13-bankruptcy/.
5 What Happens If I Win The Lottery While In Bankruptcy?, supra note 1.
6 Census Bureau Median Family Income By Family Size, justice.gov, http://www.justice.gov/ust/eo/bapcpa/20130501/bci_data/median_income_table.htm (last visited Dec. 9, 2014).