The Forest, The Trees, The Lottery, The Court

When you file for bankruptcy, chances are pretty good that it’s not because you want to – it’s because you have no other options.  It’s a solution of last resort, and rightfully so – the system is set up to protect those who can’t pay their debts according to the original contractual terms.

What happens, then, when you experience a windfall of some sort after your case is filed?

If you’ve filed a Chapter 7 bankruptcy, most windfalls after your case hits the courthouse steps are yours and yours alone.  There are certain exceptions when it comes to things like inheritances, but if you hit the right numbers in the Mega Millions drawing it’s yours to keep.

In a Chapter 13, it may be different.  Depending on how your Chapter 13 Plan is worded and how far along into the case you are, a windfall might be yours to keep or it may be considered to be disposable income that needs to be earmarked for your creditors.

Atlanta bankruptcy lawyer Peter Bricks, in an article written for my friend and colleague Russ DeMott of Charleston, SC, takes the position that it’s unfair for someone to be forced to give up lottery winnings or face dismissal of a Chapter 13 case.  He claims that the winner of a lottery winner in Georgia who was in an active Chapter 13 case is somehow at a disadvantage because she won’t have the ability to remain under court protection and must instead pay her creditors.

First, the article fails to note that a debtor in an active Chapter 13 bankruptcy case is able at any time to amend the repayment Plan to call for payment of 100% of all debts based on a change in circumstances.  Court documents indicate that the Chapter 13 trustee was already seeking dismissal due to the debtor’s failure to make Plan payments and provide required documents in her case.  The Chapter 13 trustee brought up the lottery winnings in supplemental papers only, and then sought only to have them added to the Plan payments.

More to the point, however, is the fact that if you win the lottery and can afford to pay your debts, you probably want to do so.  At least, that’s how my clients think.  And I’m not just talking about the situation where you get an extra $500 or so – in those cases, the money can likely find a very good use.  No, I’m talking about the huge, fat, hairy, walloping windfall situation.

Let’s face it: nobody wants to be in bankruptcy.  If you owe $150,000 and suddenly come into $300,000 then you’re likely going to want to write a check and move on with your life.  In the case discussed in the article, the lottery winner owed $67,000 at the time of her bankruptcy filing yet won $250,000.  Though she has a family with financial needs, she had enough to pay off her debts in full and move on with her life.

Why wouldn’t she want to do just that?  I’m betting that she’d stopped making her Plan payments because she didn’t want the relief offered by the U.S. Bankruptcy Code.  She no longer needed it, so she was content to move on with her life.

I, for one, wish her well and hope that she did pay the debts in full when she won the lottery.  I’m sure she’ll rest easier at night knowing that the U.S. Bankruptcy Code existed for her at a time when she needed it, just as it’s there for anyone else who’s behind the 8-ball financially.

Here’s a link to the original news story, in case you’re interested.

Photo credit:  Robert S. Donovan

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  1. As the author of that article, I can assure you that I was not taking the position that it was unfair that her case faced dismissal due to her lottery winnings. I was merely pointing out that the lottery winnings are “disposable income” and had the effect of sinking her plan.

    As a full reading of the article would have made clear, I was stating that in her case she probably no longer needed the bankruptcy; however, someone who wins a lower amount in the lottery- let’s say $5,000- would still need the ch. 13 to remain active, but would need to forfeit the funds.

    Additionally, although the article didn’t go into these details, there are other unexpected sources of income that are impacted in a ch. 13 along similar lines. For instance, a personal injury settlement will function in a similar way.

  2. Jill Whiteford says:

    I agree with Peter Brick’s comment. This article misinterprets what Peter wrote. I read Peter’s article regarding the Georgia woman’s case getting dismissed. Peter didn’t state or imply that it is unfair for a debtor to give up her lottery winnings while in an active Chapter 13 bankruptcy case.

    Peter merely commented that the debtor may have thought she could keep her lottery winnings while the trustee payments stayed the same. Peter also points out that this would be an inaccurate assumption. Even though Peter didn’t include all of the details that are mentioned in this article, he did mention that the lottery winnings needed to be included in the plan.

    Both of your interpretations of the Bankruptcy Code are correct as it pertains to lottery winnings or an increase in income during an active Chapter 13 case.

    Jay, I think you needed to read Peter’s article more carefully before critiquing his interpretation of bankruptcy law. But other than that, I love your work.

    By the way Peter, I enjoyed reading your article as well.