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Johnson, et al. v. Fink : How a Windfall Can Impact a Bankruptcy

May 31, 2012

Those who file for an Orange County bankruptcy are typically doing so because they feel they've been left with few other options, and they understand that this can be a means of obtaining a fresh start. cashwave.jpg

Orange County Bankruptcy Attorney Vincent Howard knows that in order for clients to qualify for a Chapter 11 bankruptcy, as well as to protect their assets in the process, there is very specific protocol that needs to be followed. This is particularly true when clients have the good fortune to come into a windfall of money in the process of a bankruptcy. This can happen either through an unexpected inheritance or a lottery winning.

It seems somewhat rare, but it happened in a case out of Missouri, called Johnson, et al. v. Fink. In this case, the actions of the debtors led to the courts rejecting their Chapter 11 bankruptcy relief request altogether.

Here's what happened:

Back in late 2010, a Missouri couple filed a petition for a Chapter 13 bankruptcy. Unlike a Chapter 7, which is a liquidation of assets, a Chapter 13 allows for a repayment plan.

After a little back and forth (the couple didn't realize that a $4,000 tax refund had to be included in the liquidation process, and that had to be corrected), a final plan was finalized in April of 2011.

The following month, the trustee of the bankruptcy found out that the couple had won $20,000 in a lottery. The couple then filed a motion with the court, which they titled "Regarding Spending Lottery Winnings." In that motion, they indicated that their after-tax winnings were around $14,200. They indicated that they had already spent $1,500 of that on items they said were "necessary," as well as car repairs.

They then put the remaining $12,700 into a trust account held by their attorney. However, a few days later, the debtors told the court they had actually spent another $200, and then decided to purchase a car for $5,800. The debtors said those expenses were necessary, and that only $5,200 remained in their trust account.

The bankruptcy trustee raised two concerns about this:
1. That $1,500 was unaccounted for.
2. The lottery winning could constitute additional disposable income.

The lottery winners said that they should be allowed to keep and spend their winnings, according to 11 U.S.C. 1306, which says that estate property includes any debt or moneys acquired after the bankruptcy is granted, but before the end of the case. The court agreed that the money belonged to the estate, but said it was not within the debtors' right to spend it however they wished.

The debtors then tried to apply the remaining balance of their winnings - about $6,700 - to their debts as a lump sum to go toward their monthly payments.

It was determined, however, that the subsequent modifications weren't properly filed, and that the debtors did not properly handle their windfall.
Subsequently, the court dismissed the Chapter 13 case, leaving them stuck with other debts.

What this reveals is that if you are in the midst of a bankruptcy, you need to make sure that you properly report any and all income, assets and winnings to your attorney as soon as possible.

Orange County Bankruptcy Attorney Vincent Howard at HOWARD LAW can help. You can reach us toll-free at 1-800-872-5925 or send us a message online.

Additional Resources:
Johnson, et al. v. Fink

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