If You File for Chapter 13 and Get Money From the Lottery Will the Trustees Take the Money You Won?

by John Csiszar, Demand Media
    The bankruptcy court has the final say in the disposition of your Chapter 13 assets.

    The bankruptcy court has the final say in the disposition of your Chapter 13 assets.

    When you file bankruptcy, you hand over control of your assets to the bankruptcy court in the form of your "bankruptcy estate." Although the court typically doesn't take possession of your assets, it does control your estate administratively. While a Chapter 13 bankruptcy can usually protect more of your assets than a Chapter 7 can, winning the lottery could result in a windfall for your creditors.

    Chapter 13 Assets

    Debtors who file Chapter 13 bankruptcy typically either cannot qualify for Chapter 7 or have substantial assets they want to protect. Chapter 13 provides blanket protection for all of a debtor's assets, regardless of value, unlike a Chapter 7 liquidation bankruptcy. If you win the lottery immediately after you file Chapter 13, your case trustee cannot simply take the lottery proceeds away from you. If you had instead filed Chapter 7, your winnings would likely be considered non-exempt, meaning the trustee would likely take the money.

    Chapter 13 Payment Plan

    Bankruptcy law requires you to make monthly payments for up to five years if you file Chapter 13. At the time you file your petition, you must submit a payment plan for approval by the court. The amount of your monthly payment is based on a combination of your income after expenses and the amount you would have had to pay creditors if you filed Chapter 7 instead. If you win the lottery, that money would likely be non-exempt in a Chapter 7 case, so you must include it in your payment plan if you file Chapter 13. An exception would be if your plan already called for the 100 percent repayment of your debt, in which case, you could keep your lottery winnings.

    Modification of Payments

    One of the negative aspects of Chapter 13 bankruptcy is that it lasts so long. If your financial situation changes during the multi-year Chapter 13 process, you must report these changes to the court. A significant increase in your income could translate into higher payments for your creditors. Even if you don't hit the lottery until the fourth year of a five-year repayment plan, you must still inform the court. If your winnings are significant, you're likely to see an increase in the size of your monthly payments.

    Conversion to Chapter 7

    If your income is low enough to qualify, you can convert your Chapter 13 case to a Chapter 7 case at any time. Many debtors convert to a Chapter 7 to put a quick end to their bankruptcy and stop making payments to creditors, since a typical Chapter 7 lasts only a few months. However, if you convert to Chapter 7, you'll likely lose some or all of your lottery winnings, since Chapter 7 exemptions typically protect only day-to-day necessities.

    About the Author

    John Csiszar began writing in 1989 at the ERIC Clearinghouse for Junior Colleges. His work appears in various online publications, including The Huffington Post. Csiszar earned a B.A. in English from UCLA and served 18 years as an investment adviser and certified financial planner.

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