Lottery Winnings and Bankruptcy

Bankruptcy law has a very broad definition of "income". It is very important to disclose income from all sources to the Bankruptcy Court, whether it is regular, steady income, such as a paycheck, or one-time payments such as bonuses or lottery winnings. It can effect your case in a couple ways.

All lottery and gambling winnings are considered income by the Internal Revenue Service, subject to taxation. This is regardless of whether the winnings are for $10 or $10,000,000. This income must be disclosed to the Bankruptcy Court, as well. The Statement of Financial Affairs in the bankruptcy petition requires filers to disclose "income other from employment or operation of business" for the past 3 years. This includes lottery winnings. You'll want to make sure you have total winnings calculated for all 3 years.

A form W2-G will be mailed to winners of significant lottery money. You will use this form to file your taxes, in the same way a W2 form is used to calculate your taxes. It is important to pay taxes on this money, as failure to do so may lead to a tax obligation that is not dischargeable in bankruptcy. You should also have a copy of the W2-G form for your bankruptcy attorney.

Lottery winnings are also important because they can effect your Means Test calculation. Without going into too much detail here, your Means Test calculation is a 6-month look-back at all sources of income before filing bankruptcy that determines if you must repay your creditors. Lottery winnings are considered income for this purpose, even though they are usually "one time" payments. This could result in you having to pay back creditors in a Chapter 13 bankruptcy. Therefore, it is very important use disclose recent lottery winnings with your attorney. You may be forced to wait to file (when the winnings are no longer in the look-back period), or if they winnings are very large, you may be able to file at all (at least without paying some money to your creditors).

One other important thing to note about lottery winnings... you must disclose any winnings after your case is filed. Yes, AFTER! Any lottery winnings within 6 months of filing should be disclosed to your attorney. It may seem unfair, but it is a part of bankruptcy law. So, I usually advise my clients to not play the lottery coming out of bankruptcy, as you may be required to pay winnings to your creditors.

Contact us if you are considering bankruptcy, but have recently won in the lottery. Your good luck doesn't need to end with filing bankruptcy, but it is important to have an experienced bankruptcy attorney walk you through the process.