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What Happens if I Win the Lottery While in Chapter 13 Bankruptcy?

First of All, There Are Bigger Problems to Have in Life …

lottery while in chapter 13 bankruptcy

Image by Bartosz Senderek, courtesy of Wikimedia Commons

Regardless, Questions About Winning a Lottery While in Chapter 13 Bankruptcy Are Common …

This is easily in the top 5 of most common questions potential clients ask us when sitting down with us to explore the possibility of filing a Chapter 13 bankruptcy. We love the optimism  involved, no question about it, but the short answer to the question is, “We’ll cross that bridge if we come to it.”

But still—what is the real response? What if you did win a $300 million jackpot while in a confirmed (approved by the court) Chapter 13 payment plan?

Let’s back it up and talk about financial windfalls of any sort and not just a prize lottery while in Chapter 13 bankruptcy.

First, What Is a Chapter 13 Bankruptcy?

A Chapter 13 bankruptcy is a reorganization or “payment plan” bankruptcy in which, through the Federal Bankruptcy Court, you repay some of what you owe to your creditors based on your ability to repay after your necessary household expenses are taken into account on a monthly average basis.

So, if you have $200 left over every month after buying groceries, gas, clothing, cat food, Drano, etc., etc., etc., you would pay $200/month to the Chapter 13 Trustee assigned to your case by the Bankruptcy Court for 36-60 months (depending on various factors). Whatever your creditors get based on that payment in that finite amount of time, that’s all they get and the unpaid remaining balance of any (dischargeable) debt that you have is then discharged in full, same as it would have been in a Chapter 7 bankruptcy.

Depending on how much that is in total, you will repay somewhere between 0.5-100% of your debt, interest-free, free of taxable liability—and free of creditor harassment for the duration.

Lottery Prizes & Other Financial Windfalls While in a Chapter 13

So what happens if some financial windfall comes your way? The bottom-line is that, depending upon how your attorney drafted you plan and with what specific provisions, the windfall is likely to be considered to be either an asset of your bankruptcy estate (the legal estate created by the filing of the bankruptcy petition, which the Chapter 13 Trustee is Trustee of) or net annual income. Either way, it arguably belongs to the plan and the Trustee, a point-of-view which Chapter 13 Trustees will certainly argue.

If you are already paying 100% of what you owe to your creditors through the Chapter 13 bankruptcy, you may be able to negotiate with the Chapter 13 Trustee to simply repay the balance owed into the payment plan in a lump sum to “buy” you out of the bankruptcy a little faster and still get the discharge.

You may also discuss with your bankruptcy attorney the option of simply dismissing the Chapter 13 bankruptcy and using the windfall to deal with your debt outside of the bankruptcy, which may be a good option depending upon taxable liability and other issues. (One advantage of a Chapter 13 bankruptcy over a Chapter 7 bankruptcy is that you have a virtually absolute right to dismiss a Chapter 13 voluntarily at any time, while you have no such right in a Chapter 7 bankruptcy.)

If your Chapter 13 payment plan requires you to pay less than 100% of what you owe to your creditors, negotiating with the Chapter 13 Trustee to repay 100% of your owed debt to your creditors rather than the lower percentage you might otherwise have paid them would likewise be possible.

The Bankruptcy Code requires you to remain in a Chapter 13 payment plan for a full 60 months unless your household’s total income is below the median income for a household of your size in your state per the mathematical calculation of the “means test” (better known as the income eligibility test for Chapter 7 bankruptcy) unless you are repaying 100% of what you owe in fewer than 60 months.

If you are able to increase your payout percentage to 100% for some unexpected reason, you may be able, in other words, to “buy” your way out of the Chapter 13 bankruptcy earlier.

Winning the Lottery While in Chapter 13 Bankruptcy: The Bottom-Line

The bottom-line is that, if you are in a Chapter 13 bankruptcy, you need to let your bankruptcy lawyer know if any unexpected lottery or other proceeds come your way. You are likely under a good faith duty to disclose the proceeds to the Court and to the Chapter 13 Trustee in any case, but, otherwise, your lawyer will want the opportunity to advise you accordingly, based on your particular plan, your particular circumstances, and the particular local rules and case-law of the Federal judicial district in which your specific Chapter 13 case was filed.

If you are a Michigan resident and would like to explore your options for a Chapter 7 or Chapter 13 bankruptcy with an experienced Michigan bankruptcy attorney, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.

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If you enjoyed reading “What Happens if I Win the Lottery While in Chapter 13 Bankruptcy?” please browse our other articles on our main Michigan Bankruptcy Blog.

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