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Navigating Bankruptcy with Cryptocurrency Investments

As the use of digital currencies like Bitcoin continues to grow, bankruptcy courts are facing new challenges in how to handle these novel assets.

If you’re a cryptocurrency investor considering filing for personal bankruptcy, it’s critical to understand how your crypto holdings will be treated and the strategies you can use to protect them.

How is Cryptocurrency Handled in Bankruptcy Proceedings?

When you file for bankruptcy, your bankruptcy trustee is tasked with identifying and valuing all of your assets, including any cryptocurrency you may own. However, the legal classification of crypto assets is still a gray area, and trustees have taken different approaches.

Some trustees have argued that cryptocurrency should be treated as property, meaning it would be subject to exemptions and could potentially be protected from liquidation, similar to how primary residence or retirement accounts are handled.

Other trustees have viewed crypto as more akin to cash, which would make it a non-exempt asset that the trustee could seize and sell to pay off creditors.

Ultimately, how your crypto is classified will depend on the specific circumstances of your bankruptcy case, the bankruptcy chapter you file under (Chapter 7 or Chapter 13), and the discretion of your assigned trustee.

This uncertainty highlights the importance of consulting an experienced bankruptcy attorney who can advocate for the most favorable treatment of your digital assets.

Strategies to Protect Cryptocurrency in Bankruptcy

Even if your crypto is deemed a non-exempt asset, there are several strategies you can employ to try to protect it during the bankruptcy process:

• Timing Your Bankruptcy Filing: If you anticipate filing for bankruptcy, you may want to consider the timing. For example, if the value of your crypto holdings has recently declined, filing for bankruptcy at that time could result in a lower liquidation value.
• Maximizing Exemptions: Some states allow you to exempt a certain amount of “cash on hand” from bankruptcy liquidation. If your crypto is treated as cash, you may be able to protect a portion of its value using these exemptions.
• Restructuring Investments: Prior to filing, you could explore options to convert your crypto into other exempt assets, such as a primary residence or retirement account, though you’ll need to be careful not to be viewed as trying to shield assets from creditors.
• Arguing for Unique Treatment: Your attorney may be able to make the case that your crypto holdings are sui generis (one-of-a-kind) and should be treated differently than traditional cash or property, potentially protecting them from liquidation.
• Negotiating with the Trustee: In some cases, you may be able to negotiate a compromise with the trustee, such as an agreement to liquidate only a portion of your crypto holdings.

Unique Challenges for Crypto Investors in Bankruptcy

Beyond the uncertainty around how crypto assets will be handled, cryptocurrency investors face several other unique challenges when navigating the bankruptcy process:

• Volatility: The notoriously volatile nature of cryptocurrency markets can complicate the valuation of your holdings, both for you and the bankruptcy court.
• Traceability: Cryptocurrency transactions are recorded on a public blockchain, which can make it difficult to hide or move around your digital assets before a bankruptcy filing.
• Access and Control: If you lose access to your crypto wallet or private keys, you may be unable to access or transfer your holdings, even if the court rules in your favor.
• Specialized Knowledge: Bankruptcy trustees and judges may lack familiarity with the technical aspects of cryptocurrency, making it harder for them to make informed decisions about its treatment.

To overcome these challenges, it’s crucial to work closely with a qualified bankruptcy attorney who has specific expertise in handling crypto assets.

They can help you navigate the complexities of the bankruptcy process and ensure that your digital investments are protected to the greatest extent possible.

Where Can I Find Help?

Dealing with bankruptcy doesn’t have to be a single-person job. The bankruptcy lawyers at Parker & DuFresne will help you determine the best course of action to help you get out from under your debt and move forward to a debt-free future.

Call today at 904-733-7766 for a free consultation, or click the button at the top of the page to schedule online.