The status of cryptocurrency in bankruptcy largely depends on the type of bankruptcy filed and how courts interpret the asset class. Bankruptcy filings in the United States typically fall under Chapter 7, which involves asset liquidation, or Chapter 13, where debtors repay a portion of their debts through a repayment plan. Different bankruptcy chapters treat assets differently, so knowing how cryptocurrency fits within each chapter’s framework is crucial for those with digital assets.
Given cryptocurrency’s legal and technological complexities, it’s essential to understand how digital assets are valued, treated, and potentially liquidated in bankruptcy. Let’s explore cryptocurrency and its role in bankruptcy proceedings, including how valuation and classification impact the process and what to consider if you hold digital assets.
Cryptocurrency as an Asset in Bankruptcy
In bankruptcy cases, courts generally categorize cryptocurrency as an asset. This means debtors must disclose all cryptocurrency holdings, just as they would bank accounts, investments, or real estate. The court treats cryptocurrency holdings as part of the debtor’s estate, so bankruptcy trustees can access these assets to pay creditors.
While traditional assets like cash and property are easy to value, cryptocurrency’s value changes rapidly. This volatility requires trustees to use the currency's value as of the bankruptcy filing date, although some trustees monitor changes in cryptocurrency value if liquidating the asset takes time. The lack of government regulation also complicates tracking and liquidating cryptocurrency, making transparency essential in these proceedings.
Valuing Cryptocurrency in Bankruptcy
The valuation of cryptocurrency in bankruptcy cases is challenging. Trustees generally value cryptocurrency based on the market price at the time of filing. However, rapid price swings can create issues, especially if the currency's value drops or rises significantly after filing. Some courts have adopted practices to periodically reassess digital asset values during lengthy cases to prevent creditors from missing out on possible gains.
Valuation also impacts the debtor's required disclosures. Bankruptcy filers must report all cryptocurrency holdings with as much detail as possible, including purchase dates and value at filing. Using accurate records from exchanges and keeping documentation can help debtors meet these requirements.
How Chapter 7 Bankruptcy Affects Cryptocurrency
In Chapter 7 bankruptcy, trustees liquidate non-exempt assets to pay off creditors. Because the court considers cryptocurrency a non-exempt asset, it’s typically subject to liquidation unless protected under state or federal exemptions. Exemptions vary by state, but cryptocurrency often doesn’t qualify under common asset exemptions like homestead or motor vehicle exemptions.
For example, a debtor holding Bitcoin must report its value when filing. The trustee then decides if the Bitcoin should be liquidated to repay creditors. Because cryptocurrency prices fluctuate, trustees often sell these assets quickly to secure value for creditors. Debtors in Chapter 7 should carefully evaluate any exemptions they may qualify for to protect as much of their digital assets as possible.
Cryptocurrency in Chapter 13 Bankruptcy
In Chapter 13 bankruptcy, debtors propose a repayment plan rather than liquidating assets. For those with cryptocurrency, this means the court may allow them to retain their digital holdings, provided the asset’s value is factored into their overall financial standing and monthly payments. Chapter 13 requires an assessment of disposable income, which includes the value of any cryptocurrency assets.
Since Chapter 13 allows debtors to keep some assets, the debtor’s cryptocurrency might remain with them, but it could affect the monthly payments to creditors. The bankruptcy court expects full disclosure and fair valuation of all assets, including digital ones.
Under Chapter 13, maintaining cryptocurrency may be more feasible, but debtors should consider potential increases or decreases in value and how that could impact repayment. They should also consult with an attorney before attempting to sell their crypto for cash to keep up with their debts, because doing so might violate the repayment plan’s terms.
Preparing for Bankruptcy with Cryptocurrency Holdings
Preparing for bankruptcy requires careful planning, especially with cryptocurrency assets involved. Accurate record-keeping, including purchase dates, transaction histories, and valuations, is essential to satisfy court requirements. Organizing cryptocurrency records can streamline the filing process and help avoid delays or legal challenges.
Considering potential exemptions before filing can also be beneficial. While federal and state laws don’t yet specify cryptocurrency exemptions, some asset protection strategies, such as holding assets in specific accounts or understanding how to claim exemptions, may still help shield a portion of cryptocurrency.
Working with a knowledgeable attorney who understands both bankruptcy and cryptocurrency is a valuable step in protecting assets and navigating these legal processes effectively.
Contact Us for Legal Assistance
Nguyen Law Group can provide the legal support you need throughout the bankruptcy process. If your assets include cryptocurrency, we offer legal guidance that can help you understand your rights and responsibilities when you wish to file for bankruptcy.
Learn more about our legal services and request a consultation when you contact us today.