Cryptocurrency has gone from a niche product to a large-scale consumer investment. Bitcoin, Etherium, Dogecoin, and other cryptocurrencies are increasingly popular. According to NASDAQ, about 46 million Americans own Bitcoin.
So what happens when someone who owns cryptocurrency files for bankruptcy? In this article, we will discuss:
- Do I have To Disclose My Cryptocurrency In My Bankruptcy?
- Can A Bankruptcy Trustee Find and Access My Cryptocurrency?
- How do I Value My Cryptocurrency in Bankruptcy?
- Is My Cryptocurrency Exempt in Bankruptcy?
- How Do I Classify My Cryptocurrency In Bankruptcy?
- Do Any Other Bankruptcy Rules Apply To Cryptocurrency?
Do I Have To Disclose My Cryptocurrency In My Bankruptcy?
The short answer is yes. Even though the value of cryptocurrency can fluctuate wildly day-to-day (or minute-to-minute), it is clearly an asset. Debtors must disclose all of their assets, even those that are hard to value. Failing to disclose an asset can lead to severe penalties, including criminal prosecution for bankruptcy fraud.
This means that every investment, no matter how small, must be disclosed. Cryptocurrency is held in a digital wallet. Only the person in possession of a private key can control a digital wallet. This means that a debtor will have to cooperate with a bankruptcy trustee if the trustee wants to access the value of the crypto assets.
Can A Bankruptcy Trustee Find and Access My Cryptocurrency?
In its early days, cryptocurrency was a very obscure asset. Many trustees were likely unaware of it. However, now that cryptocurrency is gaining popularity, it is also gaining visibility. Coinbase, a popular crypto exchange platform, went public in 2021. Coinbase has a webpage directed at bankruptcy trustees, so it’s safe to say that they are aware. Coinbase will assist trustees with locating the crypto assets of specific debtors, provide trustees with digital wallets to transfer and hold cryptocurrency, and freeze accounts, among other services.
Given that cryptocurrency can be sold for cash, it is an asset that can be easily liquidated once the trustee has control over it. This cash can, in turn, be distributed for the benefit of the creditors.
How Do I Value My Cryptocurrency in Bankruptcy?
It can be very difficult to place a value on cryptocurrency. The price of any specific coin can fluctuate rapidly. An asset that has very little value when a debtor files their petition can skyrocket in value post-petition—and vice versa. This can create problems for both Chapter 7 and Chapter 13 filers.
In a Chapter 7 bankruptcy, the bankruptcy trustee will look for assets that can be sold to repay creditors. A crypto asset with very little value at the time of filing can jump in value by the time the meeting of the creditors occurs. This means that exemptions that could have been used to protect the asset may have been used elsewhere, leaving it exposed.
In a Chapter 13 bankruptcy, the repayment amount under the Chapter 13 plan is based on the value of your non-exempt assets. Cryptocurrency is generally a non-exempt asset. This means that high-value holdings will significantly increase the amount that must be repaid under the plan. Another issue is that, if a Chapter 13 filing is later converted to a Chapter 7, then those assets may be liquidated.
Is My Cryptocurrency Exempt In Bankruptcy?
Generally, no. There is no specific exemption for cryptocurrency. Some investments, like 401(k), pension, and other retirement plans have specific exemptions carved out in bankruptcy. Holders of crypto will have to utilize other exemptions. For example, in Illinois, a debtor is entitled to claim a “wildcard” exemption of $4,000. This could be used to protect up to $4,000 in cryptocurrency holdings.
How Do I Classify My Cryptocurrency In Bankruptcy?
Cryptocurrency does not neatly fit into one category of asset. It functions like cash. However, because of how it is traded, it looks more like stocks or bonds. Until the law adapts to cryptocurrency, its status will continue to be ambiguous. Given that it must be disclosed, it can always be scheduled as an “other asset.”
Do Any Other Bankruptcy Rules Apply To Cryptocurrency?
Most likely, yes. Even if crypto isn’t directly addressed by current laws, the laws still apply to crypto. Transferring assets to hide them from creditors is still a fraudulent transfer. Liquidating crypto to pay one creditor to the detriment of the others may still be a preference.
An experienced bankruptcy attorney can help you determine the best way to handle your cryptocurrency holdings when you file. They can also help you avoid running into related legal issues.
Call our office at (630) 324-6666, email info@flaherty-law.com, or schedule a consultation with one of our experienced bankruptcy lawyers today. You can also fill out our confidential contact form and we will get back to you shortly.
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