What happens to your cryptocurrency when you file for bankruptcy?

Bankruptcy law can affect your various assets in different ways. For example, depending on if you file for Chapter 7 or Chapter 13 bankruptcy, your home could be safe from creditors thanks to the homestead exemption. But what if you have invested in a cryptocurrency like Bitcoin?

Cryptocurrency is a new phenomenon, and state and federal laws and regulations have yet to catch up in many ways. This includes bankruptcy law, which is somewhat ambiguous in relation to crypto. Currently, there is no exemption explicitly protecting crypto from creditors. But the “wildcard” exemption could apply. When a debtor does not claim the homestead exemption, they can instead take the wildcard exemption, which lets you exempt any property from liquidation up to $15,420 in value. So, if you have that amount or less worth of cryptocurrency investments, this could be a way of keeping them.

More bankruptcy issues for crypto investors

Some other issues crypto traders might encounter in the bankruptcy process include:

  • Classifying. Cryptocurrency is traded like stocks and bonds, but also functions like cash. Bankruptcy law has yet to determine which category to classify crypto into when disclosing your assets. For now, one possible option is to list it among your “other assets.”
  • Valuation. You must provide the value of your assets at the time of filing. However, cryptocurrencies tend to be more volatile than stocks, real estate and other assets. The value of your crypto at a certain date might be very different than what it’s worth a month later. Depending on which form of Bankruptcy you filed for, this could affect how important using the wildcard exemption for your crypto might be.

Your best bet for keeping your crypto and avoiding trouble with the bankruptcy court over it is to follow the advice of your bankruptcy attorney.

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