What Happens to Your Cryptocurrency in a Bankruptcy Situation?

Filing for bankruptcy is complicated and sometimes difficult to understand. However, just because you don’t understand it doesn’t mean you can make up your own rules.

We recommend hiring an attorney and carefully playing by the established rules.

Do You Have to Disclose Cryptocurrency Holdings in Bankruptcy?

Crypto, which includes a variety of digital currencies and “coins” like Bitcoin and Ethereum, is a largely misunderstood asset class. It’s something brand new (relatively speaking) and totally foreign to the average person.

Even those inside the world of traditional finance and investing are somewhat confounded. People don’t know what to make of it. This confusion extends over into questions like, does crypto have to be disclosed in bankruptcy?

The simplest answer to this question is yes. Cryptocurrency is clearly an asset and must be disclosed like any other asset would be in a bankruptcy.

“Just because you’re the only one who has the passcode, doesn’t mean you can fail to disclose the fact that you own $5,000 or $5 million worth of Bitcoin,” bankruptcy attorney Rowdy G. Williams says. “It’s still a financial asset.”

It doesn’t matter if it’s Bitcoin, Ethereum, or some small alternative coin like Dogecoin, any and all property you own – digital or physical – must be disclosed in your bankruptcy petition and filings. It’s as simple as that.

Can the Bankruptcy Trustee Find/Access Your Cryptocurrency?

Bitcoin and other digital currencies used to be a very obscure asset class. And while they’re still fairly obscure in the sense that the majority of Americans do not have significant crypto holdings, cryptocurrency has gained a lot of recognition and prominence in the public eye over the past five years.

(You’d be hard-pressed to find any adult who hasn’t at least heard of Bitcoin.) This means you can no longer have your crypto “fly under the radar” in a bankruptcy. There will be very specific questioning to ensure all of your crypto is accounted for.

For example, Coinbase – which is the largest crypto exchange platform on the web – has its own dedicated webpage for bankruptcy trustees. Coinbase will actually help assist trustees in locating assets of specific debtors and even freeze accounts when necessary.

In other words, this is a huge part of bankruptcies right now and trustees will almost certainly find your crypto if needed.

How is Cryptocurrency Valued in Bankruptcy?

One of the most challenging aspects of cryptocurrency is its volatility. It’s very challenging to place concrete value on Bitcoin, Ethereum, etc. Prices fluctuate rapidly, often within the same hour or day.

This means an asset that had a ton of value when a petition was filed could be worth a lot less post-petition (or vice versa). This is challenging for folks filing for Chapter 7 and Chapter 13.

If you’re filing for Chapter 7 bankruptcy, the trustee is going to review your assets for anything that can be sold to repay your creditors. If a crypto asset wasn’t worth very much when you filed, but suddenly surges by 20 or 30 percent, exemptions that could have been used to protect your crypto may have already been used elsewhere. This leaves your Bitcoin exposed.

With a Chapter 13 bankruptcy, your repayment amount is predicated on the value of your non-exempt assets (which includes cryptocurrency). So if crypto prices suddenly take off, it’ll increase the amount you have to repay.

Bankruptcy trustees are becoming much more familiar with the nuances of cryptocurrency in bankruptcy situations, but it’s still fairly new territory in the industry. The basic takeaway is that it’s complicated.

Will Cryptocurrency be Exempt in Bankruptcy?

Okay, so let’s get to the part that everyone wants to talk about: exemptions. As you may know, certain assets are exempt in bankruptcy (and it depends on the specific type of bankruptcy you file). For example, there are exemptions that protect your home up to a certain value. And then there are exemptions on things like jewelry, family heirlooms, burial plots, and even particular types of retirement accounts. However, there are no specific exemptions on virtual currency. This doesn’t mean your bankruptcy attorney won’t be able to structure your bankruptcy in a way that protects some of your digital coins, but it will require a full analysis of your situation.

Putting it All Together

Crypto can be a confusing topic, especially when analyzed within the context of bankruptcy. However, if you have crypto holdings and are considering bankruptcy as an option for your financial circumstances, you’ll definitely want to do your due diligence and ensure you’re prepared.