Windfalls after Bankruptcy: Who Gets the Money?

In most situations, your bankruptcy estate consists of assets you owned or had a right to at the time you filed. Which assets are and are not included in the bankruptcy estate can be very important, since the trustee can use non-exempt assets to pay creditors. 

Generally, income after filing–even if it’s a lot of income–is yours to keep. If that sounds a little too good to be true, you’re wise to ask questions. The good news is that it’s mostly true. But, it’s important to understand which assets will and will not be available to the trustee.

So, what happens if you win the lottery a few days after you file? Suddenly receive a settlement from an insurance company after your claim has been languishing for a year? Inherit a mansion when your uncle passed away just after you receive your bankruptcy discharge? 

Each of these questions has a different answer. Here’s how treatment of after-acquired assets is determined.

Determining Whether the Trustee Has a Right to Assets

The very first step is determining whether or not the bankruptcy trustee has a right to any of the assets that are being discussed. This is typically answered by asking two questions:

When Did you Become Entitled to the Asset? 

This question is key to determining which assets are and are not included in the bankruptcy estate. This question resolves the insurance company settlement question above. You may have received payment from the insurance company after your bankruptcy case was filed. But, if the incident that gave rise to the claim–say, a car accident–happened before you filed, your right to that compensation existed when you filed. It should have been listed as an asset in your bankruptcy case, even if you didn’t know the amount you would ultimately receive or when you might get it.

The bankruptcy trustee will typically be entitled to claim any non-exempt portion of the settlement and distribute it to creditors.

The date you became entitled to the asset resolves the lottery ticket question, too. If you bought the lottery ticket the day after you filed for bankruptcy and won a few days later, you’re generally entitled to keep your winnings. But, what if you bought the ticket earlier? That situation plays out much like the insurance settlement. If you owned the lottery ticket when you filed, any non-exempt portion is part of the bankruptcy estate, even though you had no idea what it was worth when you filed. 

Why Did You Receive the Money or Property?

The other key question is how you came to be entitled to the property. This is important because, while most income and property you receive after filing is yours to keep, there are some exceptions in the U.S. Bankruptcy Code.

Property received within 180 days of filing becomes part of the bankruptcy estate if:

• You receive the money or other property through inheritance, 
• You receive a payout as beneficiary of a life insurance policy, or
• You receive money or property in a divorce case, whether by agreement or court order

Protecting Your Property

As a general rule, any income or property you were entitled to in advance of filing becomes part of the bankruptcy estate. So does any property acquired through one of the means listed in the statute. But, that doesn’t necessarily mean that you’ll lose your winnings, inheritance, or other property. 

Depending on the value and type of assets you receive and the amount of debt listed in your bankruptcy petition, you may want to explore one or more of the following options: 

• Determine whether you can exempt the property–this will depend on the nature of the property, its value, and what other exemptions you have already claimed in your bankruptcy case
• Explore the possibility of dismissing your bankruptcy case–you don’t have an absolute right to dismiss a Chapter 7 case, so you probably won’t be able to dismiss unless you make other arrangements to pay your creditors
• Consider converting to a Chapter 13 bankruptcy case–this can be especially useful if you’ve inherited non-monetary property and don’t want the bankruptcy trustee to seize it or to sell it yourself to pay off creditors.

When in Doubt, Contact an Attorney

Sometimes, unexpected windfalls happen, and there’s no way you could realistically have been prepared. For example, shortly after filing bankruptcy you may receive an inheritance from someone who passed away unexpectedly, or someone you didn’t know had provided for you in their will. If you’ve already filed bankruptcy and have come into money or property, notify your bankruptcy attorney immediately. If you filed your bankruptcy case on your own, you’ll want to seek out advice from an experienced Los Angeles bankruptcy attorney right away. 

Often, though, working with an experienced bankruptcy attorney from the start can help avoid this type of issue. If you have reason to believe assets may be coming your way in the near future, you already have a claim to receive future compensation of uncertain value, or you otherwise expect a change in circumstances, tell your lawyer. Your bankruptcy attorney can explain the risks and benefits of filing bankruptcy and how timing may impact your rights.

This is just one of the many ways seeking guidance from a seasoned professional can help you avoid pitfalls and make the most of your bankruptcy filing. At Borowitz & Clark, we’ve helped tens of thousands of people resolve debt through bankruptcy. We offer free consultations to help you make good decisions about your next steps. You can schedule yours right now by calling 877-439-9717 or filling out the contact form on this page.