What happens to your Bitcoin when you file for Bankruptcy?

Today I am going to address a few common questions I get relating to how Bitcoin is handled during the bankruptcy process. Part of being a modern bankruptcy attorney means understanding financial instruments like Bitcoin, not to mention NFTs and yield-bearing assets and protocols.

Let’s start with the basic stuff. Nothing I say here is financial or legal advice, nor should you rely on it to those ends. The purpose is to discuss how Bitcoin is treated in bankruptcy. Let’s get started!

First, Bitcoin is a decentralized cryptocurrency available for purchase online via entities called crypto exchanges. Second, you might have heard of crypto.com and Coinbase. These are two examples of centralized exchanges. Third, some people ‘mine’ Bitcoin by pledging the Stacks token in the Xverse app. Some people acquire Bitcoin through an exchange of value or services. Finally, the idea behind Bitcoin can be summed up by a quote from the abstract of Satoshi’s whitepaper: “A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution.” - from Bitcoin: A Peer-to-Peer Electronic Cash System by Satoshi Nakamoto. Source: https://bitcoin.org/bitcoin.pdf

Before we move on, I want to highlight one aspect of the quote above. You’ll notice that Satoshi is talking about eliminating financial institutions from the peer to peer system, i.e. not the government. This is a key point because the point of peer to peer is not the elimination of government regulation–if it were, a public blockchain is a poor mechanism for hiding transactions. If anything, the public nature of the blockchain makes it easy for governments to track the flow of Bitcoin through known wallets.

Am I required to disclose my Bitcoin In my bankruptcy filing?

Tldr: Yes, you must disclose all assets and property when you file for bankruptcy. This is true for cryptocurrency, which includes Bitcoin. The good news is that Washington state recently beefed up your allowed exemptions, including the Wild Card exemption, which allows you to exempt up to $10,000 of otherwise non-exempt property.

What this means is that, in a Chapter 13 filing for instance, you’ll be required to pay the value of all non-exempt Bitcoin to your creditors. The value is as of the date of the filing. So if you think your Bitcoin will appreciate in value, you might want to pay and keep it. 

Can a bankruptcy trustee locate and take my Bitcoin?

Yes. Blockchains are, by their nature, public ledgers of who owns which coins. This means that all balances and transfers are open to inspection by anyone, including the FBI, bankruptcy trustees, jealous exes, your neighbor, not to mention bots and programs designed to identify who controls any given wallet. This is true whether your coins are on a centralized exchange or in a cold wallet. Of course, centralized exchanges take it a step further by actively assisting bankruptcy trustees in identifying wallet holders. See: https://help.coinbase.com/en/coinbase/other-topics/other/bankruptcy-trustee-guide

Therefore, a bankruptcy trustee need only prove that you control the wallet containing the coins. The fact that wallets are given alphanumeric names does not mean you do not own them. Thus, simply sending coins from a centralized exchange wallet to cold storage does not relieve you of your responsibility to disclose them in your bankruptcy petition. In fact, if you do try to donate or give away your coins prior to filing, that can cause new legal problems you do not want.