How to File for Bankruptcy After Crypto Investments

Our new columnist Joye Bertschler is VP Security Token Alliance. He chose a delicate topic, that not many dare touch. Bankruptcy after a crypto crash. A doomsday scenario, that more went through then there are bitcoin millionaires. Here is Part I of 3 parts in total:

How to File for Bankruptcy after Investing into Crypto

The time of buying cryptos for a few dollars and turning a multi-million-dollar profit is seemingly over. But this does not mean one can’t put a fortune into a promising crypto currency anymore and lose it all. The crypto market is as dangerously volatile as ever.

To answer the question in the title of this article, we first have to set up a framework by asking a few questions:

  1. What exactly does bankruptcy mean and are there any differences between regular bankruptcy and one stemming from losses due to crypto investments?
  2. Does the loss of crypto assets or valuables due to changes such as fluctuations, abandoned projects, fraud or accidents qualify one for a bankruptcy application? If yes, which one and under what conditions? If no, why not? And lastly,
  3. to what degree is a debtor responsible for losses, negligence and/or ignorance?
  4. Bankruptcy. What it is, what it isn’t.

The purpose of bankruptcy is essentially freeing debtors from crippling debt. It is not meant as plan b or means of escaping intentionally taken overly risky investments, or certain debts such as taxes, alimony, child support or most student loans. Furthermore, there are four different bankruptcy filings under title 11 of the U.S. Code (the Federal Bankruptcy Code).

It is important to note that there is a distinct difference between personal finances and business finances. Donald Trump is one such example, having filled for bankruptcy 6 times. According to the law, businesses are separate entities.

And then there is personal liability and limited liability…

Especially for smaller business owners, many creditors will refuse to extend a credit or loan money without the owner’s personal guarantee.

If you sign such a personal guarantee on any loan or contract you are personally liable for the debt if the company is unable to pay.

Other cases include overpaying yourself or becoming subject to a liability case such as disposing of company assets below their market value or for free (i.e. fraud). Not to forget, a limited liability company is just one of several different business structures. There are corporations, general partnerships, a sole proprietorship and more.

  • Is a “crypto-bankruptcy” any different?
  • Cryptocurrency generally fall under “general intangible”.

Classified as such, it gives the creditor a “security interest” in the cryptocurrency. As such, the creditor may or may not sell them to satisfy a debt if the debtor defaults.

However, to further answer this, we first have to question liability, the “how” and “why” these crypto valuables were acquired, and if their loss can cause a case of bankruptcy.

Disclaimer: this is not financial advice. All pictures are under pixabay license and free for commercial use.