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Winning the Lottery May Make Bankruptcy More Likely in Some Cases

By Bartosz Senderek (Own work) [CC-BY-SA-2.5 (http://creativecommons.org/licenses/by-sa/2.5)], via Wikimedia CommonsA Georgia woman recently claimed half of the second-largest Mega Millions lottery prize in history, totaling $648 million. The only larger award occurred in March 2012, when three winners split $656 million. The woman’s story has led to an examination of lottery winners and subsequent bankruptcy cases. Research has shown that, unfortunately, winning the lottery does not reduce the likelihood that a person will require bankruptcy protection and might make bankruptcy more likely. This might be because a person does not use their winnings to resolve existing financial problems, or because they get themselves into new financial difficulties by overestimating their spending power.

The big lottery winner bought her ticket in Atlanta, and reportedly learned that she had picked the winning numbers and the Mega ball number later that day. The other winning ticket was purchased in San Jose, California, but no one has come forward to claim the prize yet. The woman in Georgia has reportedly chosen to receive the prize as a lump sum of just under $174 million in cash. After federal and state taxes, she should receive about $120 million.

Among the stories of lottery winners are many stories of people who blew through their winnings in remarkably short periods of time. Researchers from Vanderbilt University, the University of Kentucky, and the University of Pittsburgh published a study in 2009 showing that winning the lottery only postponed bankruptcy for many people. They looked at nearly 35,000 individuals who won more than $600 in a Florida lottery from 1993 to 2002, and found that around 2,000 were involved in bankruptcy within five years of their win. They found that people who won between $50,000 and $150,000 generally did not use the money to reduce debt, and were about fifty percent more likely than others to file for bankruptcy within three to five years.

One person, who won $10 million in a Canadian lottery, used the money to pay off her mortgage and student loans. She continued to spend on luxury items, however, until she only had about $750,000 left, which is not enough to support much luxury without income behind it. She reportedly avoided bankruptcy, but now lives paycheck to paycheck.

The average amount won by people in the Vanderbilt study’s sample group was reportedly $65,000, and the average amount of unsecured debt prior to winning was $49,000. This suggests that the average lottery winner could use their winnings almost immediately to become debt-free, but most do not. The reasons for this are difficult to summarize, but often seem to include a lack of financial savvy, as well as “mental accounting,” which the Wall Street Journal describes as “treating their winnings less cautiously than they would their earnings.” This may lead some lottery winners to purchase assets that they cannot maintain with their income, such as houses and cars, while not investing any of the winnings to produce future income.

Bankruptcy attorney Devin Sawdayi has represented people in the Los Angeles area in Chapter 7 and Chapter 13 bankruptcies since 1997. Our practice is dedicated to helping people in financial distress, whose income is not sufficient to service their debts, to rebuild their finances with dignity and respect. To schedule a free and confidential consultation to discuss your case, please contact us today online or at (310) 475-9399.

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Photo credit: By Bartosz Senderek (Own work) [CC-BY-SA-2.5], via Wikimedia Commons.