What Happens If You Receive a Windfall While in Bankruptcy?

For many, bankruptcy can be the first step toward financial recovery. For a few, this can happen in unpredictable ways. Take, for example, Ira Curry. Ms. Curry was this month’s mega millions winner, the second-biggest jackpot in history – quite a windfall. Ms. Curry hasn’t always been rich. In 1994, Ms. Curry and her husband filed for Chapter 13 bankruptcy, and their bankruptcy was discharged in 1999.

In the example of Ms. Curry, she had completed her Chapter 13 Bankruptcy Plan by the time she won the lottery. However, persons who file for bankruptcy, particularly Chapter 13, sometimes receive unexpected money or property during the life of their Chapter 13 Bankruptcy Plan. This is called a windfall. In those instances, the money or property can become part of the bankruptcy estate and may become seized. The law on bankruptcies and windfalls can be complicated and if you are in such a situation, you will likely need a California Bankruptcy Attorney to advise you.

A person in bankruptcy could come by unexpected money or property for a number of reasons. Perhaps the most common reason is inheritance from a relative, but life insurance, winning a lawsuit, lottery winnings, and unexpected market windfalls are also reasons. How bankruptcy treats unexpected windfalls such as inheritance depends on the type of bankruptcy.

Chapter 7 Bankruptcy and Windfalls

In Chapter 7 Bankruptcy, a court will look to when you became entitled to the asset. If you become entitled within 180 days (six months) of having filed for bankruptcy, the asset must become part of the bankruptcy estate, be given to the trustee, and dispersed to the creditors of the bankruptcy estate. Becoming “entitled” means the date at which you have the legal right to receive the property. So, for example, if the property is inheritance from a deceased relative, the date of entitlement would be the date on which the relative passed away, not the date on which you received the asset.

Chapter 13 Bankruptcy and Windfalls

Chapter 13 Bankruptcy works a little differently. To begin with, Chapter 13 Bankruptcy lasts much longer than Chapter 7 Bankruptcy due to the duration of the Chapter 13 Bankruptcy Plan. Because the Plan lasts between 3 and 5 years, it is simply more likely that a person who files for bankruptcy could unexpectedly come by an asset during that period.

There is a split among courts about whether the 180-day rule applies to Chapter 13 Bankruptcy, as well as Chapter 7 Bankruptcy. Some courts have held that the bankruptcy estate includes any property obtained during the bankruptcy, whether it is within 180 days of filing or not. For example, the Fourth Circuit Court of Appeals held that a couple who inherited $100,000 had to give the money to the bankruptcy estate, despite it being after the 180 days. Likewise, the Fifth Circuit Court of Appeals recently held that a woman who filed a personal injury lawsuit three years after her Chapter 13 Bankruptcy had to amend her bankruptcy schedule to include the lawsuit. In many instances, the Chapter 13 Bankruptcy Plan itself will specifically require you to amend a schedule to include a windfall.

Additionally, the amount that you have to pay under the Chapter 13 Bankruptcy Plan each month depends on your disposable income. Inheriting an asset could change your disposable income. For example, if a person who filed for Chapter 13 Bankruptcy inherits a house and rents that house, their disposable income would change. This increase in income may change the amount that they must pay their creditors under the Chapter 13 Bankruptcy Plan.