Oddly, this is one of the single, most universal question I get asked by people inquiring about filing for bankruptcy. Think of how long the odds are of winning, yet almost everybody worries about it being taken away if they win. That is so Canadian.
In bankruptcy proceedings in Canada, any sudden, unexpected ‘windfall’ is considered to form as asset of the bankruptcy estate and therefore subject to seizure by the trustee for distribution to the creditors.
But only during a bankrupt’s bankruptcy. (Huh?)
The only time frame in question for such a windfall is while the individual is bankrupt, i.e., prior to discharge. In bankruptcy, one must be discharged after a certain period of time. Until the court discharges you (usually an automatic process), the estate is still ‘live’ and therefore any assets which come in to the estate are subject to realization actions by the trustee.
Another type of windfall is an inheritance of significance. It is still a sudden influx of income into the bankrupt’s possession. As such, it is of interest to the trustee as the guardian of the estate (‘for the general benefit of creditors’).
The good news is that one cannot pay more than one owes. In a bankruptcy scenario, this means that any major windfall (lottery winnings) would go toward paying out the creditors’ proven claims in full, while the remainder would be returned to the bankrupt subject to court approval. The big myth-buster here? That you lose all your winnings, no matter how much you owe. FALSE.
So the best advice? If you’re going to win the lottery during bankruptcy, make sure you win big!
Usually if this kind of thing happens (and it does), the trustee would discuss the matter with the bankrupt to ensure they know their full range of options. The spirit of the BIA is ultimately the eventual financial rehabilitation of the debtor. Bankruptcy is not meant to be punitive. There are no more debtors’ prisons.
In the case of a major lottery windfall, it may be best for the bankrupt to offer his/her creditors a consumer proposal instead. This would wipe out the bankruptcy form the record and enable a better credit rating. The creditors would still expect full payment of their claims (in what would amount to a lump-sum proposal).
The best thing to do is speak to a trustee if you have questions, whether as a bankrupt or as a potential one.