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How are windfalls treated in a New York bankruptcy?

It almost sounds like a plot from a movie. You file for bankruptcy to deal with your financial struggles. Then, seemingly from nowhere, you become rich. You’ve won the biggest jackpot in history or a wealthy relative who didn’t seem inclined to help you financially in life dies and leaves you a fortune.

This sudden and unexpected receipt of money or property is called a windfall. It can come from lottery winnings, inheritances, lawsuit awards, and even life insurance. The big question is: what happens to all that money if you haven’t received your bankruptcy discharge yet?

The answer depends on the type of bankruptcy you filed, as windfalls are treated differently under Chapters 7 and 13.

Chapter 7 and windfalls

If you filed for Chapter 7, the fate of the windfall will depend on when you obtained the legal right to receive the money or property. If this event occurred within six months (180 days) of having declared bankruptcy, the asset is legally part of the bankruptcy estate and would be seized by your trustee to distribute among your creditors.

So how does this work? If, for example, you inherited money from a deceased relative, the cash would have to be surrendered to your trustee if the person died within six months of your bankruptcy filing, as this was the point when you acquired legal title to the inheritance.

Chapter 13 and windfalls

The matter of windfalls is not as straightforward with Chapter 13, as this form of bankruptcy is of longer duration, and it is a lot more likely that you could unexpectedly receive an asset during the three to five year period encompassed by most plans.

Depending on the provisions in your bankruptcy plan, a sudden influx of cash is likely to be treated as an asset of the estate or net annual income. In both cases, it becomes part of your Chapter 13 plan. There are a few different approaches you can take.

  • If the windfall is enough to cover everything you owe, you can talk to your New York bankruptcy attorney about dismissing the Chapter 13 case and dealing with the debt directly. Unlike Chapter 7, you can dismiss a Chapter 13 at any time.
  • If your repayment plan has you paying 100% of the debt to your creditors, you can approach the Trustee about using the windfall to pay the outstanding balance and thereby getting your discharge.
  • If you are required to pay less than 100% of what you owe, you can talk to the Trustee about repaying everything.

Also, the amount you are required to pay each month under a Chapter 13 plan depends on your disposable income. When you inherit a lot of money, this changes the amount of disposable income you have available and could require you to pay more to your creditors.

Windfalls can complicate a bankruptcy filing, so if there’s a possibility that you could inherit or receive money in the future, discuss it with your New York bankruptcy attorney. Your attorney will advise you on the best way to address a windfall without jeopardizing your future discharge. If you have any questions about whether or not you can file bankruptcy, then set up a free, confidential, in-person, initial consultation with Jayson Lutzky. He is a Bronx bankruptcy attorney with 35 years of legal experience. Call 718-329-9500 to set up an appointment or visit www.MyNewYorkCityLawyer.com/Bankruptcy to learn more.

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