With record lottery payouts, many of my clients are asking me:
- What happens if I win the lottery while in bankruptcy?
This not a yes or no question.
The answer depends on:
- How far along you are in the bankruptcy process
- Whether you filed Chapter 7 Bankruptcy or Chapter 13 Bankruptcy
This article explains how it works in both types of consumer bankruptcy.
- Usually creditors get paid off and you get to keep everything you win beyond what is necessary to pay them off
CHAPTER 7 BANKRUPTCY
In a Chapter 7, Bankruptcy also called a liquidation or straight bankruptcy:
- You should be able to keep the lottery winnings if you bought the ticket after filing the bankruptcy
If you bought the the winning ticket before filing bankruptcy in Minnesota, then the lottery money goes into the bankruptcy estate and gets distributed to creditors.
Most lottery winners are OK with this, because they still get to keep whatever is left over after the creditors are paid off.
- For example, if you won $1 million dollars and had $50,000 in debt when you filed the bankruptcy, you would still get to keep $950,000 of your winnings
There is some justice in this.
After all why should the creditors get nothing when you win the lottery?
CHAPTER 13 BANKRUPTCY
- In a Chapter 13 Bankruptcy, or wage earner plan, you must pay the lottery winnings in to the bankruptcy
The idea behind Chapter 13 is that you must pay what you can afford to creditors every month for three to five years, and whatever isn’t paid off at the end of this time gets discharged or forgiven.
If you have a month where you receive an unexpected lump sum or windfall, you must pay the lump sum in to the bankruptcy as well.
Just like in Chapter 7 Bankruptcy, however, you get to keep whatever you win after the creditors are paid off.
What should you do if you win the lottery?
- If you win the lottery while in bankruptcy, then you need to tell your bankruptcy lawyer about it
- If you don’t then you can be charged with bankruptcy fraud
Because you still get whatever is left over after paying creditors, winning the lottery while in bankruptcy will probably still leave you debt-free and with a life-changing amount of money.
Even if you haven’t won the lottery, getting your debts discharged and gaining a fresh start might feel like you have.