If you are doing some research on this question you will most likely come across what is referred to as the "windfall provision" of the Bankruptcy Code. When an individual, business or married couple files bankruptcy, they create a bankruptcy estate. Section 541 of the bankruptcy code defines what is included and excluded from this estate. The "windfall provision" is section 541(a)(5) which holds that from 180 days after the bankruptcy filing date, the bankruptcy estate includes any bequest, devise, or inheritance; property distribution as a result of a property settlement from a divorce proceeding; and proceeds as a beneficiary of a life insurance policy or other death benefit.
This question gets more complex in the chapter 13 context. But in a chapter 7 , section 541(a)(5) is the only meaningful look forward provision as it relates to a client's chapter 7 bankruptcy and this section has narrow application.
For example, if a client files chapter 7 bankruptcy, and 5 months and 29 days later; the debtors mother dies and leaves the client a cool million as the result of a life insurance pay out; that million is subject to the bankruptcy estate under section 541(a)(5). However, Under the New Jersey state exemption scheme, any proceeds that a debtor receives from a term life policy of a deceased are deemed fully exempted from creditors of both the insured and the beneficiary of the policy. N.J.S.A. 17B:24-6. Under the federal exemption scheme, such a life insurance policy would be exempt only to the extent reasonably necessary for the continued support of the debtor and his or her dependents. 11 USC 522(d)(11)(c). However if the proceeds the mother left were from her last will and testament, this would be a game changer and the proceeds would be property of the bankruptcy estate in the amount that those proceeds were not protected by exemptions.
As a general rule, in chapter 7 bankruptcy, any earnings and income of the client that are earned after the bankruptcy is filed belong to the client. But, even this general rule can get complex. For example, you file bankruptcy and a friend who you lent money to for concert tickets, but never paid you back, suddenly knocks on your door with the money he owed you. The bankruptcy trustee will more than likely seize those funds.
Why? Because your right to repayment existed before you filed bankruptcy.
As with any asset of a bankruptcy client, there are 3 questions; (1) is the asset part of the bankruptcy estate, (2) if the asset is part of the bankruptcy estate, is there an exemption to protect it; and (3) if the asset is part of the bankruptcy estate, is there any unavoidable security interest in that asset from a lender?
Section 541(a)(5), mentioned above does not mention lottery winnings. In chapter 13 bankruptcy, the cases share the opinion that lottery winnings are subject to the chapter 13 bankruptcy. In the chapter 7 context, the issue will depend on when the ticket was purchased; if the ticket was purchased before filing bankruptcy, the bankruptcy estate gets the winnings; if the ticket was purchased after the client files bankruptcy, the client will at least have the funds to litigate the trustees attempt to seize the funds, but the client would win.
The New Jersey personal bankruptcy attorneys at Riviere Cresci & Singer LLC can answer any questions you may have concerning retirement funds in relation to your debt, or any general bankruptcy questions. If you live in New Jersey, including Toms River, Point Pleasant, Manchester, and Lakewood, call us for a free consultation to find out how we can help you.