It might seem unusual to think of the lottery and bankruptcy together, but lotto winners have filed for bankruptcy and bankruptcy debtors have won the lottery. The odds are against it, but what if it does happen? Whether you can keep your lottery winnings in bankruptcy depends on:
When you file for Chapter 7 bankruptcy, you must file papers with the bankruptcy court that list everything you own. You'll include assets that are in your possession as well as assets that you have a right to receive in the future.
Exemptions. You can claim certain types of property as exempt, which protects them from your creditors and the trustee in a bankruptcy. The types of property and assets that are exempt will depend on the law in the state where you live. (Find out what property is exempt in your state.)
Anything that you can't claim as exempt is property of the bankruptcy estate. You must turn it over to the Chapter 7 trustee to be liquidated (sold) to pay your creditors. (To learn more, see Bankruptcy Exemptions: An Overview).
The first question to ask is whether your lotto winnings property of your Chapter 7 bankruptcy estate. If they are, then you can keep them only if you can protect them with an exemption.
Whether your lotto winnings are part of your bankruptcy estate will depend on when you bought the ticket. The date of the drawing (and therefore the date you actually win) isn't important.
If you bought your ticket and won the lottery before you filed for bankruptcy, you must list your winnings in your bankruptcy schedules. You'll have to turn them over to the trustee unless you can claim some or all of the winnings as exempt.
This rule applies even if you hadn't claimed the winnings before you filed. If you held the winning ticket at the time you filed or if you were entitled to future payments as a result of a past lotto win, you must disclose the amount you're entitled to receive in your schedules.
If you file for bankruptcy after you bought your lotto ticket but before the drawing, the winnings are still part of the bankruptcy. The bottom line: If you hold the ticket at the time that you filed for bankruptcy, technically you should list the ticket in your bankruptcy schedules. The ticket (and any subsequent winnings) would be property of the bankruptcy estate, even if you overlooked listing it. The winnings are proceeds from the ticket, and the ticket was part of your bankruptcy when you filed.
In Chapter 7, with few exceptions, your assets are determined as of the date you file. Lottery winnings used to be one of the exceptions to this rule, but it isn't anymore. As long as you purchased your ticket after you filed, and you did not use hidden assets (such as an undisclosed bank account) to buy the ticket, any winnings are yours to keep. It doesn't matter whether you bought your ticket before or after you received your discharge or whether the drawing took place before or after your discharge.
At this time, no state has an exemption specific to lottery winnings. However, there are other types of exemptions that you might be able to use to protect some (or perhaps all) of your winnings. The particular exemptions available to you depend on the state in which you live.
Some types of exemptions which might protect all or part of your lotto winnings include:
You can amend (change) your exemptions at any time before your case is closed, so if you forget to list your ticket and win the lotto after you file, you should be able to file an amendment to claim any of the protections that might be available to you.
Any winnings above your allowed exemption amounts go to the bankruptcy trustee to the extent necessary to pay your debts. However, if there is money left after all of your debts and the costs of the bankruptcy are paid, the excess will be returned to you.
Concealing assets or transferring assets to someone else to hide them from the trustee and the creditors in your bankruptcy case is bankruptcy fraud. Engaging in fraud could not only result in your discharge being denied or revoked but are bankruptcy crimes. Bankruptcy crimes are federal offenses punishable by up to five years in prison and fines up to $250,000. (Learn more about bankruptcy fraud consequences.)