In most cases, hitting the lottery provides a great financial benefit. Unfortunately, if you recently declared bankruptcy, your winnings may be short lived. Although your lottery winnings will generally not affect the discharge of your debts, in some situations you may not be able to keep what you win. The amount you win, the state you live in and the time since you filed bankruptcy all play a role in determining what you can keep.
The 180-day Rule
If the courts took everything you owned to pay off your creditors, you would be in such a bad financial position after filing bankruptcy that you would be likely to file again as soon as legally possible. As a result, the courts generally allow you to keep the income you earn after you declare bankruptcy. An important exception applies to inheritances and sudden windfalls, such as lottery winnings. In those cases, the court has the ability to claim assets you receive within 180 days of your bankruptcy discharge. It is entirely possible that you lose most or all of any lottery winnings you receive within about six months of your bankruptcy discharge.
If you had little by way of possessions when you filed bankruptcy, you may stand a chance of keeping at least some of your lottery winnings. Each state allows bankruptcy debtors to protect a specific amount of assets from seizure by the bankruptcy court. If you had available exemptions that you did not use at the time you filed bankruptcy, you may be able to re-open your bankruptcy case and add your lottery winnings under your state's exemptions. Realistically, most states only allow exemptions for cash of a few thousand dollars at most, so you should be prepared to turn over the bulk of any large lottery winnings.
An important part of bankruptcy law is the stipulation that you tell the complete truth to the bankruptcy court. If you fail to disclose your lottery winnings while within the 180-day window, the trustee can recommend that the bankruptcy court revoke your discharge. The trustee also has the right to recommend a criminal charge of bankruptcy fraud.
Chapter 13 Bankruptcy
Chapter 13 bankruptcy is less common than Chapter 7 bankruptcy because it involves paying back creditors as much as 100 percent of the debt owed. Chapter 13 does allow debtors to retain all of their property, unlike Chapter 7. However, even in Chapter 13 you must report your lottery winnings to the court, and it is likely that those winnings will be used to repay your creditors.
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John Csiszar earned a Certified Financial Planner designation and served for 18 years as an investment counselor before becoming a writing and editing contractor for various private clients. In addition to writing thousands of articles for various online publications, he has published five educational books for young adults.