As cryptocurrency and other digital assets become more mainstream, bankruptcy courts are increasingly required to address how these assets are treated in consumer and business filings. All assets, whether they are physical or digital, must be disclosed during the bankruptcy process.
While cryptocurrency technology may be new, bankruptcy law applies traditional principles of disclosure, valuation, and asset liquidation to digital holdings. Often, a bankruptcy trustee’s biggest challenge is identifying cases where a debtor has or had cryptocurrency in the first place. Debtors do not typically list cryptocurrency in the Schedules or Statement of Financial Affairs, so cryptocurrency is often identified through reviewing the debtor’s bank statements, credit card statements, and PayPal transactions.
In bankruptcy, cryptocurrency such as Bitcoin, Ethereum, and NFTs is considered property of the bankruptcy estate, just like cash or investment accounts. Debtors must disclose all digital assets, regardless of whether they are held in a personal wallet, an exchange account, or a decentralized finance platform. Failure to disclose crypto holdings can result in denial of discharge or allegations of bankruptcy fraud.
Valuation Challenges
One of the most complex issues is valuation. Cryptocurrency prices are highly volatile, and courts typically value digital assets as of the petition filing date. Sudden market swings can significantly affect whether an asset is exempt or subject to liquidation. Trustees may seek court approval to sell crypto quickly to avoid market risk, while debtors may argue for exemptions based on fluctuating values.
Exemptions and Liquidation
Most states do not have crypto-specific exemptions. Instead, digital assets are usually covered under wildcard exemptions or treated as personal property or investment assets. If exemptions do not fully protect the asset, a trustee may liquidate cryptocurrency and distribute the proceeds to creditors.
Trustee Actions
Cryptocurrency transactions occur rapidly and can be transferred through transactions that appear virtually anonymous. The perceived anonymity and speed of these transactions are key factors driving widespread adoption of digital assets. At the same time, these characteristics create a heightened risk that assets may be concealed or dissipated before they can be administered, making swift action by a trustee essential.
Depending on the facts of the case and the debtor’s level of cooperation, trustees have several tools available to safeguard cryptocurrency assets. Central to any effective strategy is obtaining control over the debtor’s digital wallet and the associated private keys, as possession of both is necessary to preserve or administer cryptocurrency holdings.
As with other assets that are not immediately turned over and may be depleted or transferred beyond recovery, trustees should develop a clear plan for addressing cryptocurrency when it is part of the bankruptcy estate. One practical step is to contact major U.S.-based virtual currency exchanges to understand their procedures for identifying customer accounts, locating transaction histories, and producing records.
Contact Us Today
Bankruptcy cases can be complex, especially when cryptocurrency is involved. Many filers fail to list it as an asset, so lengthy investigations are common. The Law Offices of Adam M. Freiman can help you understand your options and ensure all forms are accurate and complete. To schedule a consultation with our office, fill out the online form or call (410) 486-3500.
