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Digital Currencies Are Assets in Bankruptcy

It did not take long for the Internet to create new markets for consumers. It’s one of the Internet’s primary contributions to people’s lives. Like all new things, as it comes into contact with old laws, novel pitfalls emerge—like debt collectors on social media. Because people transact frequently via the World Wide Web, debtors sometimes wonder what would happen to their digitally stored money in a New York bankruptcy. The commonsense short answer: Just because it’s virtual doesn’t mean it’s not an asset. Usually it is.

The most likely example debtors will encounter is money they deposit into a PayPal account, or something similar. Because it’s easily denominated in U.S. dollars, bankruptcy courts consider those accounts’ contents cash assets in bankruptcy, and debtors must list them on their bankruptcy schedules accordingly. It does not matter where the money is stored—just like tangible cash. If the money is in a different state or country, or cloud on the Internet, they must appear in the bankruptcy schedules. Debtors caught moving money around electronically to keep it away from the bankruptcy estate can expect a nasty adversary proceeding.

Although debtors will need to produce six months’ worth of PayPal statements with their petitions, the good news is that they can protect this money with cash exemptions. The federal exemptions permit debtors to shield $1,250 in cash plus up to $11,850 in an unused homestead exemption. The New York exemptions give debtors $1,100 if they claim the homestead exemption but if they forgo it then they receive the lesser of $5,525 or $11,025 minus their personal-property exemptions.

The next question debtors may have is: What about digital currencies, like Bitcoin? The truth is these have not appeared often in bankruptcy. Indeed, given how many Bitcoin enthusiasts use it to evade countries’ capital controls, it’s probable that some debtors have tried to hide wealth with Bitcoin. It’s a bad idea, not only because doing so defrauds the bankruptcy court, but also because the markets for these assets are so volatile that debtors might lose more money than the shell games are worth.

Bitcoin, however, is not U.S. currency as far as the Bankruptcy Code is concerned. The issue arose at least once, in a bankruptcy case in northern California. The trustee argued that the 300,000 Bitcoin the debtor transferred to a third party was a commodity and not a currency. Commodities’ values rise and fall as the market dictates, but currency is valued in its exact denomination. As a result, when the 300,000 bitcoin appreciated in value, then the trustee was entitled to the full appreciation upon transfer to the bankruptcy estate. This was a big win for the bankruptcy estate and creditors in the case.

The law doesn’t always keep up with new developments, but sometimes existing concepts can be extended to cover the new situations. That appears to be true with money stored in an online account or digital currency. No matter what assets you have, if you encounter financial difficulties, then talking to an experienced New York bankruptcy lawyer can help you strategize your options.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced Brooklyn bankruptcy attorney Bruce Weiner for a free initial consultation.

Rosenberg, Musso & Weiner, L.L.P
26 Court St # 2211
Brooklyn, NY 11242, USA

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