What Happens If You File Bankruptcy And Then Win The Lottery?

By Kelly M. Walsh, Esq.

When you file bankruptcy, it is typically your last resort.  You have tried everything and have no realistic hope of being able to resolve your debts in a reasonable amount of time without using the relief offered by bankruptcy to get a fresh start.  But there is often still a glimmer of hope or the possibility that maybe things will suddenly turn around.  It might be the winning lottery ticket, an inheritance, or a settlement on a legal claim that maybe you didn’t even realize you would have at the time you filed.

People who file bankruptcy also usually want to make sure that they are protecting what they have.  They do not file unless they are assured they will not lose the house or car they rely upon.  If an asset is going to be liquidated by the trustee or surrendered to a creditor, it is necessary to spend a good deal of time in advance carefully considering and weighing pros and cons before proceeding with a calculated strategy to let something go.  But careful planning may not be possible if the asset is something you come into suddenly and unexpectedly.  What happens then?  Do you get to keep it, or do you have to hand it over to the bankruptcy trustee?  The answer is complicated and ultimately it depends on a variety of factors.  Most importantly, it depends on what you got and when you got it.

1. Is it part of your bankruptcy at all?

When you file bankruptcy, there is a set moment in time that determines what is and what is not property of your bankruptcy estate.  Subject to some exceptions, Section 541(a) of the bankruptcy code identifies that the bankruptcy estate is made up of “all legal or equitable interests of the debtor in property as of the commencement of the case,” meaning the moment the bankruptcy petition is filed.  Basically, everything you own or have a right to at the moment you file your bankruptcy petition is included among the assets in your bankruptcy.

Certain kinds of property can be part of your bankruptcy estate even if you first acquire them after you file your case.  An inheritance or payment from a life insurance policy is part of your bankruptcy estate if the person in question passed away within 180 days after you filed your bankruptcy.

In the case of the winning lottery ticket, it is not a question of when you won, but of when you bought the ticket.  Suppose you buy a lottery ticket for one dollar on a Monday.  Tuesday you file your bankruptcy petition.  Wednesday the drawing reveals that you are the winner of a million dollars.  Well, you had the winning ticket in your pocket at the time you filed.  The ticket was part of your bankruptcy estate when its value was only a dollar, and it is still part of your bankruptcy estate when its value is a million dollars.  But what if you bought the ticket on Wednesday morning instead?  In that case, you did not own any legal or equitable interest in the ticket at the moment your bankruptcy petition was filed, so your million dollar winnings have nothing to do with your bankruptcy.

But what if it’s something you didn’t even know you had when you filed?  Legal claims can be tricky like that.  Suppose you were treated with a pharmaceutical or had a surgical implant that later became part of a class action law suit?  At the time of treatment or of surgery, you would have no idea it would later give rise to a legal claim.  At the time you file your bankruptcy, you might not have any symptoms yet, or you might not have any idea what is causing the symptoms.  Is that claim you had no way of knowing about part of your bankruptcy estate?

While you are required to list on your bankruptcy schedules all assets that are known, including legal claims, you are not required to list every hypothetical, tenuous, or fanciful claim.  In other words, if you really did not have reason to know you had a realistic legal claim, you will not be punished for failing to list it.  That does not mean it will not be part of your bankruptcy estate, though.  Any post-petition interest, such as a legal claim, that is sufficiently rooted in your pre-petition past can be part of your bankruptcy estate.  That could be true even if you only realize you have the claim after your bankruptcy case is over.  Whether that claim is part of your bankruptcy estate or not is a complex legal determination that will always require review and analysis by an attorney and may require additional filings in your bankruptcy case to get a formal determination from the judge.

2. How much do you have to give to the Trustee?  And should you just dismiss your case?

If the lottery winnings, inheritance, or similar sudden payout is part of your bankruptcy estate, you may be concerned that you will have to lose all of it.  For some, the gut reaction is to think they may as well just dismiss their bankruptcy case.  Whether that reaction is out of a desire to keep the money from the Trustee’s clutches or the thought that the debtor may as well pay the creditors themselves, the reaction is ultimately not in the debtor’s best interests.

First, there may be a good faith argument that the asset is not part of your bankruptcy estate.  If that is the case, it probably does not make sense to just give up without letting your attorney make those arguments on your behalf.  Even if it is part of your estate, there is still more that can be done to protect your interests.

In bankruptcy, you have a right to protect a certain amount of your assets from being paid over to your creditors using statutory provisions called “exemptions.”  Bankruptcy exemptions protect a variety of different types of property up to certain limitations.  Even if a piece of property is part of your bankruptcy estate, it is not necessarily subject to liquidation by the Trustee.  Your attorney can list the asset and claim exemptions to ensure you protect every penny you are entitled to protect.  If you can exempt it, you get to keep it. 

Even if the asset turns out to be substantially more than your attorney can protect, and there is enough unexempt value that you are required to pay all of your creditors through your bankruptcy, you will still likely have less to pay through bankruptcy than if you dismiss your case and have to pay your creditors yourself outside of bankruptcy.  Your creditors are only entitled to get paid through your bankruptcy if they file a Proof of Claim, which must be filed in the bankruptcy court by a set deadline.  Sometimes some of your creditors will not file a Proof of Claim.  Even if all of your creditors do file Proof of Claims, the amounts are limited to what was owed at the date you filed.  If you were to dismiss your case, you would have to pay more money, including post-petition interest and fees, to accomplish the same result as if you had simply paid the claim through your bankruptcy.

3. What if you just don’t tell anybody about it?

As your mother used to tell you, honesty is the best policy.  At the very least, you should consult with your attorney, who can evaluate whether it is part of your bankruptcy estate and take steps to protect your interests.  Failing to do so could cause some substantial problems down the road.

Federal law provides criminal penalties for bankruptcy crimes.  Pursuant to 18 USC. § 152, concealment of assets, making false statements in a bankruptcy case and withholding information relating to the property or financial affairs of a bankruptcy debtor from the Trustee are identified as bankruptcy crimes, which may be punished by fines and imprisonment for up to 5 years.

Additionally, failure to properly disclose your claim in your bankruptcy could prevent you from being able to recover from that claim down the road.  If you know of a legal claim at the time of filing bankruptcy, and you do not list it on your bankruptcy schedules, you risk having your later litigation of the claim barred under the doctrine of judicial estoppel on account of the conflicting positions—first in bankruptcy that no such claim exists, and later in litigating the claim in another court.  That was the subject of litigation in a series of asbestos cases in the Third Circuit over the past few years.  In some circumstances, if the claim was known at the time of filing bankruptcy and failure to list it on bankruptcy schedules was in bad faith, the litigation court may bar the claimant from recovering anything on account of the claim.

Further, it may be found that you do not have the authority to pursue the claim after your bankruptcy.  If your case was a Chapter 7 and it is part of your bankruptcy estate, the bankruptcy trustee is the real party in interest who has authority to litigate the claim.  If the case was a Chapter 13 and it is part of your bankruptcy estate, you would have to obtain approval of any settlement after notice to all parties in interest, so you may not have the authority to even accept a settlement without approval of the bankruptcy court.

If you are considering bankruptcy contact a Scaringi Law expert attorney at 717 657 7770.