Imagine that you have been wrestling with debt for a couple of years, and finally decided to take charge and reclaim control of your finances. You hire us at Bond & Botes and file Chapter 7 Bankruptcy. A few weeks after you file, you buy a Tennessee lottery ticket while you are 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, 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 will 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 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 of which you were not aware 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. On the contrary if you become 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 because 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 is 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. Most jurisdictions in the Eleventh Circuit, which includes Alabama, has ruled that debtors in Chapter 13 have an ongoing obligation to disclose as long as the Chapter 13 case is pending.
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.
Bond & Botes Helps People Struggling with Debt
The first step toward a brighter financial life is educating yourself about your rights and options.
You can begin gathering information right now by scheduling a free consultation with one of our experienced bankruptcy and creditor harassment lawyers at Bond & Botes. We can answer all your questions regarding Chapter 7 Bankruptcy, Chapter 13 Bankruptcy, stopping a foreclosure or wage garnishment, avoiding liens, stopping law suits, discharging medical debt, personal loans, payday loans, credit card debt, etc. We can alleviate your stress! We want to help and we can help you!
Bond, Botes, Sykstus, Tanner & McNutt, P.C.
102 South Court St, Suite 314, Florence, AL 35630
Phone: 256-760-1010 • Fax: 256-760-1023
Office Hours: Monday – Friday • 8am to 5pm
No representation is made that the quality of legal services to be performed is greater than the quality of legal services to be performed by other lawyers.