Imagine that you’ve been wrestling with debt for a couple of years, and finally decided to take charge and reclaim control of your finances. You hire an attorney and file Chapter 7 bankruptcy. A few weeks after you file, you buy a Tennessee lottery ticket while you’re paying for gas and you win.
Under the U.S. Bankruptcy Code, any non-exempt income you receive or have a right to before filing Chapter 7 bankruptcy becomes part of the bankruptcy estate. But most post-filing earnings are not included in the bankruptcy estate. In other words, the earnings are yours to keep. In legal terms, that means lottery winnings from a ticket you purchased a few weeks after filing have nothing to do with the bankruptcy case—you can keep the money. Note, though, that the date you bought the ticket is the date that counts, not the date you found out you won. A ticket purchased pre-filing is itself an asset of the estate, and if it turns out to have monetary value, that’s estate property.
Of course, the fact that you can proceed with the bankruptcy does not necessarily mean you’ll want to. That decision will likely depend on the amount of debt you were discharging and the amount of money you received. For example, if you were discharging $23,000 in credit card debt and medical bills and you picked up $472,504 in the lottery, you might choose to settle with your creditors and dismiss the bankruptcy case.
You will want to discuss the situation with your bankruptcy attorney right away, and before you take any action.
Some Post-Filing Income Does Belong to the Bankruptcy Estate
Bankruptcy law specifies some types of post-filing income that will be considered part of the bankruptcy estate. The following types of property generally become a part of the bankruptcy estate–and therefore available for distribution to creditors unless they are exempt–if received within 180 days of filing:
- Property received through an inheritance, bequest or devise
- Property received through a property settlement with the debtor’s spouse or by order of the divorce court
- Property received as a beneficiary of a life insurance policy or death benefit plan
Pre-existing interests that you were not aware of may also be property of the bankruptcy estate. For instance, if you were injured by a medical device and had a lawsuit in the works or already filed when you filed your bankruptcy petition, that claim would become part of the bankruptcy estate. If you were injured after filing, any claim would not be part of the bankruptcy estate. But what if you were injured prior to filing and did not realize you might have a legal claim? Your interest in that claim existed at the time of filing, even though you were not aware of it, and thus is likely considered property of the bankruptcy estate.
In short, income or property received after the Chapter 7 petition is filed typically belongs to the debtor and is not available for the trustee to distribute to creditors. Even so, income that falls into one of the listed exceptions above or that comes as a result of a pre-existing legal interest generally becomes part of the bankruptcy estate. You will want to speak with your bankruptcy attorney as soon as possible after you receive or learn that you are entitled to unexpected income to ensure that it’s treated appropriately.
Chapter 13 Bankruptcy Works Differently
A Chapter 7 bankruptcy case is a short-term process designed to wipe the slate clean. The bankruptcy estate–with limited exceptions–is defined as of the date of filing, and the debtor can begin rebuilding immediately.
Chapter 13 is a longer-term proposition. A proposed plan involves repayment over a period of three to five years. The monthly payments and the percentage of unsecured debt the bankruptcy filer pays back are based in part on income. That means a Chapter 13 debtor may have to report changes or increases in income during the term of the plan. For example, if a person wants to modify and reduce the plan payment, the trustee and court will have the opportunity to review the person’s pay stubs or income verification. If there has been an increase in income this may result in a modification of the plan to increase the amount being paid to creditors. Obviously, it would be in the person’s best interest to speak with the attorney about any plan modifications or changes in income.
How interests such as lottery winnings, personal injury claims and other significant new property interests are treated depends in part on the bankruptcy court. Different jurisdictions have reached different conclusions about when and under what circumstances a Chapter 13 debtor must disclose this type of income to the bankruptcy trustee. For instance, the 5th Circuit Court of Appeals, which includes both Mississippi bankruptcy courts, has ruled that debtors in Chapter 13 have an ongoing obligation to disclose as long as the Chapter 13 case is pending. This is likely the position of most jurisdictions in the Eleventh Circuit as well.
Failure to disclose can have serious consequences, and not just for the bankruptcy case. In some situations, the court may prohibit the debtor from pursuing a claim that was not properly disclosed. So, it is critical that you immediately disclose any windfalls or new claims to your attorney while in Chapter 13 bankruptcy.
Talk to an Experienced Bankruptcy Attorney
The first step toward a brighter financial life is educating yourself about your rights and options. A consultation with one of our experienced bankruptcy and creditor harassment lawyers can help you find the right solution. The initial consultation is free, carries no obligation, and can be completed over the telephone or video chat. Why not schedule yours right now? Just call 877-581-3396 or fill out the contact form on this page.
Suzanne Shinn is a shareholder of several of the Bond & Botes Law Offices throughout Alabama and Mississippi. She holds a Bachelor of Science from the University of Alabama, Birmingham, and a Juris Doctorate from the Birmingham School of Law. She joined the Bond & Botes team in 1992 as its first associate attorney and has been helping clients navigate the bankruptcy process ever since. Read her full bio here.