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. This includes 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. What types of property and assets are exempt depend on the law in the state where you live. (Find out what property is exempt in your state.)
Anything that you do not claim as exempt is property of the bankruptcy estate and you must turn it over to the Chapter 7 trustee who will liquidate it (sell it) to pay your creditors. Property of the bankruptcy estate also includes proceeds that you earn or that come from any of your nonexempt assets. (To learn more, see Bankruptcy Exemptions: An Overview).
The first question to ask is: Are your lotto winnings property of your Chapter 7 bankruptcy estate. If they are, then you can only keep them with an exemption. If they are not, you can keep them regardless of exemption laws.
Whether your lotto winnings are part of your bankruptcy estate depends on when you bought the ticket. The date of the drawing (and therefore the date you actually win) is not important.
If you bought your ticket and won the lottery before you filed for bankruptcy, you must list your winnings in your bankruptcy schedules and must turn them over to the trustee unless you can claim some or all of the winnings as exempt. This is true whether or not you claimed the winnings before you filed. If you held the winning ticket at the time you filed or if you are entitled to future payments as a result of a past lotto win, you must disclose the amount you are 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 held the ticket at the time that you filed for bankruptcy, technically you should have listed the ticket in your bankruptcy schedules. The ticket (and any subsequent winnings) is property of the bankruptcy estate, even if you overlooked listing it. This is because the winnings are proceeds from the ticket that became 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 is not 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 does not 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 may be able to use to protect some (or perhaps all) of your winnings. The exemptions that are available to you depend on the state you live in.
Some types of exemptions which may protect all or part of your lotto winnings include:
Personal property exemptions. All states have some type of exemption for personal property, and some of those include cash. The amounts vary greatly depending on what state you live in.
Wildcard exemptions. These are catch-all exemptions that allow you to apply a certain dollar amount to any type of property. Many states have a wildcard exemption. Some are small ($200) and some are in the thousands of dollars. Some states provide a wildcard only if you don't use the homestead exemption (or some other type of exemption). These tend to be the largest. (Learn more about how the wildcard exemption works in bankruptcy.)
Annuity exemptions. Several states have exemptions for annuities. If there is an annuity exemption in your state, it may or may not apply to long term lotto payouts. For example, Florida has an unlimited annuity exemption but at least one court has determined that it does not apply to a lottery payout where the winner was not the owner of the annuity or the named beneficiary. On the other hand, a Texas court found that the Texas annuity exemption does protect a lottery payout.
Tenancy by the entirety. Some states recognize tenancy by the entirety forms of ownership which protect assets or property owned together by husband and wife from creditors of only one of the spouses. Application of entireties ownership in bankruptcy is always complicated.
You can amend (change) your exemptions at any time before your case is closed, so if you win the lotto after you file, you can file an amendment to claim any of the protections that may 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 is returned to you.
Concealing assets or transferring assets to someone else in an effort to hide them from the trustee and the creditors in your bankruptcy case may 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.