How Does Bankruptcy Affect Cryptocurrency?

Texas Bankruptcy Lawyer Explains

Video Transcript: 

David Shuster: 

Just because it's cryptocurrency and it has that name and it's not a bank statement, it's not jewelry or a car, it's still something that you own. And in bankruptcy, you have to list any property you own anywhere and everywhere.

Tom Mustin: 

What happens to your cryptocurrency during bankruptcy? We're gonna talk to attorney David Shuster about that on today's Ask the Lawyer. David, thanks for joining us.

David Shuster: 

You're welcome. Yeah, I'm glad to be here. Thanks for having me.

Tom Mustin: 

Great to see you. So the cryptocurrency markets have been pretty volatile in the last year, and a large firm just filed for bankruptcy itself. Give us your insight about cryptocurrency from your experience as a bankruptcy attorney.

David Shuster: 

Well, as a consumer bankruptcy attorney, I started... When I interview clients, right away we talk to the clients about what's going on in your financial situation. What kind of assets do you have? I started noticing a couple of years ago the clients would get through their story and then rather hesitatingly, sometimes at the very end of the consultation, sometimes in the next conversation, they would tell me, "Oh, by the way, I don't know if I have to reveal this, but I have some cryptocurrency." It's so cryptic that it's not a part of the conversation, right? So that's my exposure to it mainly. And my work is just clients when I file their consumer bankruptcy is going over their assets, surprisingly larger number of clients and potential clients despite not being investors, despite not having mutual fund accounts or money in the stock markets just saying, "Hey, I have a savings account with $1,000 in it, and then I've got $15,000 in cryptocurrency and no retirement account at all." It's just, you know, clients will, you know, people are looking for a way to get rich quick. And so it seems like that's been what I've been exposed to is just people looking to better their situation. And then unfortunately, now it seems these people are just... A lot of small investors have lost a really large amount of money.

Tom Mustin: 

So if a person is thinking about filing for bankruptcy and has a crypto account, what should they know?

David Shuster: 

Well, they should know that it's included in your list of assets. Just because it's cryptocurrency and it has that name and it's not a bank statement and it's not jewelry or a car, it's still something that you own. And in bankruptcy you have to list any property you own anywhere and everywhere, that's part of the bankruptcy process. If you're asking for relief in bankruptcy court, then you're swearing under oath, under penalty of perjury that this is in fact all of your property that you own. And so what they should know is it's included in your list of assets.

Tom Mustin: 

So you kind of touched on this, so what happens to crypto during bankruptcy? It just becomes another asset?

David Shuster: 

It's another asset that goes on their schedules, that's property that they own. And they have to disclose it. And if you don't disclose it, and you knowingly fail to disclose it, then you've committed a crime, basically. So they should just know that if they look... If they're needing relief from their creditors, from their debt, and they're needing to come into bankruptcy court to do that, where you can get a lot of great relief from your debt, you're entitled to that, that, you know, look, you've got to make a fair and honest disclosure. So don't try to hide anything.

Tom Mustin: 

So how is a crypto account valued during bankruptcy? And what if it's a very volatile account?

David Shuster: 

That's a good question, because it is very volatile. And it's valued, you know, we put a value that they give us, we talk to the client right before they're gonna file, we do this even with stock accounts. And I think some people have Tesla stock, and that was kind of going up and down. And so we get them to give us the value, I don't look it up, you know, but we get them on the phone and say, "We need a value of your account," and then we get it. And then we proceed with the filing. And yeah, they can figure out the exact minute that a bankruptcy is filed. So if it is a situation where there's a spike or a drop, it can be figured out what it was at that very moment.

Tom Mustin: 

So is crypto treated differently if you file for Chapter 7 versus Chapter 13 bankruptcy?

David Shuster: 

Well, in a 7 versus 13, in a 7, you file the bankruptcy, and if you have this asset, or maybe let's say you're one of these guys or girls that say, "Hey, I didn't think I had to list it, Mr. Trustee, but now that you asked me, yes, I do have a crypto," you know, you filed Chapter 7, then you're gonna lose that asset, the trustee in a Chapter 7 will take assets that are not exempt, put them into a bankruptcy estate and distribute them for the benefit of creditors, whereas in a Chapter 13 bankruptcy, you're not as at risk of losing anything. There's not a risk of losing something in a Chapter 13. It's just a question of that value of the cryptocurrency will represent a figure that will determine how much you have to pay creditors back. So if you have $10,000 in cryptocurrency that you cannot fit in a set of exemptions, then you would have to repay at least $10,000 to the unsecure creditors over a period of time. So you wanna keep your crypto, you can file Chapter 13 and just keep that $10,000 of crypto and then pay back that $10,000 over a three to five year period. So it's still beneficial to do so.

Tom Mustin: 

So you almost... I think you've answered my next question, but so there are exemptions that you can file to exempt your crypto account in bankruptcy.

David Shuster: 

Yeah, they vary state to state. In Texas, you have the Texas exemptions or the federal, you get to choose which scheme, okay? So the Texas exemptions will not have an exemption for cryptocurrency. However, the federal exemptions do allow a wildcard exemption that can be used for cash, okay? So you could have $14,000 of cryptocurrency and if you don't need to use that wildcard category for cash in the bank or anything else, then you can apply that to crypto and you could keep theoretically $15,000 or so of cryptocurrency and still file Chapter 7.

Tom Mustin: 

Well, David, great insight on a really hot topic here. We appreciate you joining us.

David Shuster: 

Yeah, it's fun stuff. I tell you that just reading the news pops about that current crypto exchange, I think it's gonna make a really good Netflix documentary one day.

Tom Mustin: 

I think it will. Well, great to see you, David. And that's going to do it for this episode of Ask the Lawyer. My guest has been David Shuster. If you want to ask David about your situation, call the number you see on the screen. Thanks for watching. I'm Tom Mustin for Ask the Lawyers.

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