Table of Contents
Bitcoin and other cryptocurrencies occupy a unique place in finance today. On one hand, the concept is well-established: bitcoin launched in 2009 and many early adopters saw substantial gains. Several other digital currencies have sprung up in recent years, including Ethereum, Cosmos, Dogecoin, Litecoin, Cardano, Polkadot, Stellar and others. Though Tesla quickly backed out of its high-profile decision to accept Bitcoin, some auto dealerships around the country do accept cryptocurrency. And, more than 21 million Americans own crypto in one form or another.
On the other, the value of cryptocurrency is volatile. In some ways, owning Bitcoin and other digital currencies is more like investing in high-risk stocks than it is like having money in your wallet. Enthusiasts point to the benefits of direct transactions without fees, greater confidentiality, security, and adaptability as benefits. But, the fact that crypto moves outside the financial mainstream and offers greater confidentiality than standard financial accounts can inspire a false sense of security.
In part, that’s because–depending on the platform and your choices–access to cryptocurrency assets may be lost as easily as losing a passcode or access to a device. In fact, the New York Times recently reported that about 20% of Bitcoin is currently “stranded” in accounts owners can’t access. In part, it’s because many digital currency owners overestimate what being off the traditional financial grid means for them when it comes to matters like tax filings and bankruptcy.
Disclosure of Bitcoin and Other Cryptocurrency in Bankruptcy
The most common question we hear regarding cryptocurrency is “Do I have to disclose my Bitcoin in bankruptcy?” Worse, some people considering bankruptcy simply assume that their Bitcoin and other crypto assets are protected. Isn’t that one of the benefits of keeping assets in that secure, outside-the-mainstream form?
The short answers are:
- Yes, you must disclose Bitcoin in bankruptcy.
- No, cryptocurrency assets aren’t subject to some special protection simply because you have the only passcode to access them.
Bitcoin and other digital currencies are property, and all property must be disclosed in your bankruptcy petition and schedules.
Can the Bankruptcy Trustee Locate and Access Cryptocurrency?
In the very early days of Bitcoin, many bankruptcy trustees weren’t familiar with cryptocurrency. And, it was nearly impossible to access information. But, times have changed. Coinbase, a global cryptocurrency exchange platform, provides detailed information on its website about how the company assists bankruptcy trustees through steps such as freezing accounts, creating trustee accounts, transferring digital assets. Coinbase can even transfer virtual currency directly to a judgment creditor account.
Are Cryptocurrency Assets Exempt in Bankruptcy?
Some assets are exempt in bankruptcy, meaning that the bankruptcy trustee can’t liquidate them to pay creditors in a Chapter 7 case and they aren’t counted toward available resources to make payments in a Chapter 13 case. Most California bankruptcy exemptions are specific. There’s an exemption that protects a certain amount of value in your home, for instance, and another that allows you to keep a motor vehicle up to a specified value. There are exemptions for other types of property, too–health aids, family heirlooms, jewelry, burial plots and retirement accounts, to name a few. But, there’s no specific exemption for virtual currency.
An expert tip from Erik
Cryptocurrency may be less protected than traditional accounts in a Los Angeles bankruptcy. That’s because a 2020 California statute protects “Money in the judgment debtor’s deposit account in an amount equal to or less than the minimum basic standard of adequate care for a family of four for Region 1.” Currently, that means funds in your bank account are protected up to $1,788. But, crypto is legally treated as property, not currency, and your digital stockpile isn’t a deposit account under the statute.
California does offer a “wildcard” exemption, which is currently capped at $1,550, however it can go as high as $30,825. This exemption could be applied to crypto holdings, up to that limit, if the debtor isn’t using the wildcard exemption to protect other property.
How is Cryptocurrency Valued in Bankruptcy?
When you file a bankruptcy petition, you’re required to list your assets and to attach a value to each. The valuation of Bitcoin and other digital currencies in bankruptcy can be complicated due to dramatic fluctuations in value and the relative newness of the issue for bankruptcy trustees and courts.
While all assets gain or lose value over time, those changes take place very quickly in the crypto universe. For example, between May 9 and May 19 of this year, Bitcoin lost 40.6% of its value. Then, between 6 p.m. CST on May 19 and 6 a.m. PST on May 20, the value rebounded by 17.5%. This requires special care in preparation and filing of bankruptcy petitions and schedules listing digital currency assets, since the value may change significantly between completion of the forms and the time the debtor reviews the documents and they’re filed with the court.
Appropriate valuation may be even more complicated if the trustee is seeking to avoid a pre-filing transfer of cryptocurrency.
Cryptocurrency and Chapter 13 Bankruptcy
Chapter 13 bankruptcy works differently than Chapter 7. While some debt may be discharged at the close of the bankruptcy case, the core of the Chapter 13 case is a three to five year repayment plan. Non-exempt assets are treated differently in a Chapter 13 case, allowing the debtor greater flexibility to keep those assets and compensate for them through the repayment plan.
An Experienced Los Angeles Bankruptcy Attorney is Your Best Resource
Complete and accurate information is a powerful tool when you’re assessing your options for resolving debt. That’s true whether you’re considering whether bankruptcy is the right solution for you, wondering whether Chapter 7 or Chapter 13 bankruptcy would suit you better, are concerned about protecting your home and other property, want to know whether bankruptcy can help you avoid foreclosure or repossession, or just want to understand more about your options.
It’s especially true when your potential bankruptcy filing may involve evolving, poorly understood or unsettled issues like the treatment of cryptocurrency.
At Borowitz & Clark, we offer free consultations to make sure you have access to that information before you make any decisions. You can schedule yours right now by calling 877-439-9717 or filling out the contact form on this page.