If You File for Bankruptcy, What Happens to Your Cryptocurrency?

Cryptocurrency is no longer a novelty. The big players – Bitcoin, Ethereum, etc. – have increased in popularity to a point where crypto is now a viable consumer investment. According to an NBC News poll, 20% of American adults have invested in, traded, or used cryptocurrency.

If you’re one of these 20% and you file for bankruptcy, what happens?  We’ll go over this below, and cover the following:

• Is crypto exempt from bankruptcy?
• Are you required to disclose crypto in bankruptcy?
• How to classify crypto in a bankruptcy filing.
• How to value crypto in bankruptcy.
• Can a bankruptcy trustee find your crypto?
• Bankruptcy rules that apply to crypto.

Is crypto exempt from bankruptcy?

The short answer is no: there is no specific exemption for cryptocurrency. There are, however, exemptions under Federal law, such as the “wildcard” exemption. This exemption allows a debtor to exempt any property up to a specified value. The wildcard exemption for Federal bankruptcy is $15,420  in the event you are not claiming a homestead exemption.

In Florida, there is a personal property exemption of $1000 and a bankruptcy wildcard exemption is $4,000 for an individual filer (and double that for joint filers), for filers not claiming the homestead exemption. This means that a debtor can claim up to $5,000 of personal property if they don’t take advantage of the homestead exemption. The personal and wildcard exemption can be applied to any of your assets – meaning a debtor could potentially exempt either the federal or state wildcard amount in cryptocurrency.

Are you required to disclose crypto in bankruptcy?

Yes, you have to disclose cryptocurrency in bankruptcy. Regardless of its frequent fluctuations in value, crypto is an asset. All assets have to be disclosed by debtors, or they risk severe penalties for bankruptcy fraud.

Cryptocurrency is stored in a digital wallet. A debtor will have to allow access to this wallet if a bankruptcy trustee needs it to determine the value of assets.

How to classify crypto in a bankruptcy filing

Cryptocurrency functions like cash, but it’s traded like stocks or bonds. For now, its status – or asset category – is unclear. There isn’t a specific category under which crypto can be classified. If you file bankruptcy, you can schedule your crypto assets simply as “other assets.”

How to value crypto in bankruptcy

Because the value of cryptocurrency can change so quickly and frequently, it can be hard to place a value on it. For bankruptcy purposes, the value of an asset is determined at the time of the bankruptcy filing. Accordingly, the value of the cryptocurrency at the time of filing is used when listing the asset in Official Form A/B.

When processing a Chapter 7 bankruptcy__,__ the trustee looks for assets that can be sold to pay creditors. Crypto assets might have very little value when they are filed, and then their value can jump in time for the creditor meeting. For this reason, it is imperative to exempt the asset because value is determined as of the time of filing.

With a Chapter 13 bankruptcy, your repayment amount can be affected by the value of your non-exempt assets. Usually, cryptocurrency is considered a non-exempt asset. If you have high-value crypto, the amount that you have to repay will likely increase accordingly. And in cases where a Chapter 13 filing is converted to Chapter 7, you risk these assets being liquidated.

Can a bankruptcy trustee find your crypto?

With its increased popularity, crypto has also gained visibility. Trustees who might not have been aware of crypto in the early days are most likely aware of it now. In some cases – like with crypto platform Coinbase – they offer help to trustees trying to locate crypto assets of debtors (you can see Coibase’s Bankruptcy Trustee Guide here).

A trustee can easily liquidate crypto assets once they gain access to it, so they can distribute it to creditors.

Bankruptcy rules that apply to cryptocurrency.

While at this stage there aren’t bankruptcy laws specific to crypto, there are laws that apply to crypto as a personal asset. It would be considered fraud to transfer your crypto assets to hide them from creditors. You may be able to avoid bankruptcy if the value of your cryptocurrency can be liquidated to pay your creditors.

A specialized bankruptcy attorney can advise you on the best way to manage your cryptocurrency holdings, and help prevent possible legal issues.

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