Your chances of winning a big-dollar lottery are incredibly small (about a 1 in 175 million chance for one popular drawing). However, people do win a variety of cash prizes in these contests. If you file for bankruptcy, though, the court may take your winnings to pay off your creditors. Here's more information about this issue and a couple of ways you may be able to retain your lottery payout.
All Assets Become Part of the Bankruptcy Estate
When you file for bankruptcy, you must provide the court with a snapshot of your financial life. The court will use this information to determine whether and how much you can pay your creditors. All assets must be accounted for, including any potential sources of money such as winning lottery tickets, expected inheritances, and personal injury lawsuit proceeds. Failing to report all income sources (actual and potential) can result in your bankruptcy case being dismissed, a fine being assessed against you, and jail time if the court feels you have committed fraud in some way.
In general, only assets you acquired or were entitled to before you filed for bankruptcy must be included in your bankruptcy estate, and you're only required to report a select few assets (such as inheritances) you get after filing to the court. So, whether or not you can keep your winnings will depend on when you purchased your lotto ticket.
Regardless of when the actual drawing takes place, winnings from any tickets purchased before filing a petition become part of the bankruptcy estate if you still have the cash in hand or your bank account. Therefore, one way to protect your winnings is to use the money to pay for necessities such as rent and food or purchase needed household items such as appliances. Most household goods can be exempted from being placed in the bankruptcy estate, so you'll still enjoy the fruits of your winnings.
However, you need to be careful about what you spend the money on. If you pay over $600 to creditors using lottery winnings, the bankruptcy trustee can make the payees give that money to the court. This is not much of an issue if you paid businesses such as a credit card company. It can prove to be a problem for friends and family members, though, if you gave them money since they'll have to give the trustee money they may not have anymore.
Use Exemptions to Protect the Money
Another way you can protect your lottery winnings is to use exemptions. Both state and federal law allows bankruptcy filers to keep money and property up to a certain dollar amount out of the bankruptcy estate. For instance, Michigan allows debtors to keep up to $3,475 of equity in one vehicle.
As mentioned previously, you could use your lottery winnings to purchase exempt items such as occupational tools or place in retirement accounts. However, many states and the federal government also allow wildcard exemptions that can be applied to any asset. For example, the federal government lets a bankruptcy filer use up to $12,250 to exclude cash or property not covered by other exemptions.
Unfortunately, the exemptions will not cover large-dollar winnings. If you win $75,000 and the exemptions only cover $12,500, for instance, you would need to give the other $62,500 to the bankruptcy trustee to parcel out to your creditors. Depending on the amount you win, you may want to consider whether it's a good idea to continue with the bankruptcy filing or wait until you've spent the money or invested it in exempt assets.
Handling lottery winnings during bankruptcy can be tricky, because you can easily unknowingly commit fraud if you're not careful (e.g. transfer money in an unauthorized manner). It's best to consult with a bankruptcy attorney, such as Richard S. Ross - Bankruptcy Attorney, for assistance with protecting your windfall while still remaining compliant with the law.