Playing the Lottery in Chapter 13

lottery winnings in bankruptcyGuest post written by Atlanta Bankruptcy Lawyer, Peter Bricks

I recently read a story in the Newnan Times Herald about a struggling Coweta, Georgia mother of three teenagers who won a quarter-million dollars in the Georgia lottery. She talked about how she was going to use the money to save for her kids college and was also going to buy a new house and car.

The person who sent me the story was a fellow Forsyth County bankruptcy attorney. As such, I knew where this was headed. Sure enough, following the story, he sent me a copy of the debtor’s Chapter 13 trustee’s motion to dismiss the case.

The debtor played the lottery during her Chapter 13 repayment plan. I suppose she had always played the lottery and figured there was no harm in continuing this tradition during her case. She might have even thought she could keep her winnings while at the same time continuing her monthly trustee payment.

Unfortunately for her, she found out that Chapter 13 bankruptcy does not work like that. As soon as the trustee got wind of the lottery winning, he filed a motion to dismiss under 11 U.S.C. § 1307(c). The reason the trustee cited for dismissal is the debtor’s lottery winnings were “disposable income,” under 11 U.S.C. § 1325(a)(3) and 1325(b).

A Chapter 13 debtor’s plan is required to provide “all of the debtor’s projected disposable income . . . to unsecured creditors under the plan.” Since lottery winnings are disposable income, the debtor had to either fork over the winnings or see her case dismissed. The end result was the case was dismissed.

The good news for the debtor is most likely her unsecured debts did not exceed $250,000 (note: there are debt limits in Chapter 13), so even with her bankruptcy dismissed, she could probably pay her creditors in full and have a large part of her winnings left over.

The real person to consider here is the debtor who wins a smaller sum, say around $5,000. The debtor in that scenario probably wishes to remain in chapter 13 and retain the lottery winnings in full, and that will not be possible.

The lesson here is that it really doesn’t make sense to play the lottery (arguably ever!), especially if you’re in a Chapter 13 bankruptcy.

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