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U.S. Bankruptcy Judge Makes a Million-Dollar Ruling, Finding the Electronic “Currency” Bitcoin is Actually Property and not Currency

A United States Bankruptcy Court in San Francisco has recently released a ruling that demonstrates the differences between how bankruptcy courts handle currency versus other property or commodities such as stocks and bonds, specifically when a bankruptcy trustee alleges that a debtor fraudulently transferred the holdings in anticipation of or during a bankruptcy.

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How Bankruptcy Courts Treat Fraudulently Transferred Property Versus How They Treat Currency

Section 11 USC 550(a) of the U.S. Bankruptcy Code allows a bankruptcy trustee to avoid­­­—or cancel­­­—­a fraudulent transfer made by a bankruptcy debtor in anticipation of or during a bankruptcy. Under the accepted U.S. bankruptcy law, the avoidance of a fraudulent or otherwise avoidable transfer of cash assets will result in the bankruptcy petitioner being required to reimburse the bankruptcy estate for the amount of the transfer, in addition to any applicable interest. If a bankruptcy debtor makes a transfer of a commodity (such as stocks) or other property that is then avoided, the result is different.

After a fraudulent transfer of commodities or property is avoided, the debtor is required to reimburse the bankruptcy estate with the property itself, or the value of that property at the time of the avoidance. In some cases, this distinction is meaningless because the property is worth close to the same as it was when the transfer occurred, but in cases when the value of the property has dramatically increased (as can happen with real estate or speculative commodities), the difference can be substantial.

Bankruptcy Debtor Alleged to have Fraudulently Transferred 3,000 Bitcoins, Now Worth $1.3 Million

According to a national news report, the recent ruling in the bankruptcy case of Hashfest Technologies vs. Lowe came after the bankruptcy trustee alleged that the petitioner had illegitimately transferred 3,000 bitcoins to the defendant and sought to avoid the transfer. Bitcoin is a digital “currency” that exists independent of any central bank, and the bitcoins do not physically exist. The important issue in the case was that the 3,000 bitcoins were worth approximately $364,000 when the transfer allegedly occurred, but they are presently worth over $1.3 million.

The defendant attempted to convince the court to view bitcoins as currency so that he would only need to reimburse the estate $364,000 if the transfer was avoided. If the court had ruled in favor of the defendant, he would have been able to keep the bitcoins himself, as well as the nearly $1 million in appreciated value that the bitcoins have amassed since the transfer. Instead, the court ruled that bitcoins are “intangible property,” and they should be treated like stocks or other commodities. Although the bankruptcy court has not yet agreed to avoid the transfer or stated for certain how much the defendant would need to reimburse if the transfer is avoided, the ruling is a definite defeat for the recipient of the transfer, who had hoped the court would agree with other rulings and I.R.S. guidelines, which have previously treated bitcoin as a currency.

Are You Considering Bankruptcy?

If you or a loved one is struggling with debt and considering bankruptcy, you should contact a qualified attorney to discuss your options prior to transferring any assets or property to a colleague or family member. The skilled Louisville and Southern Indiana bankruptcy attorneys at the Schwartz Bankruptcy Law Center can help you decide how to move forward and prevent you from losing benefits from investments or assets you may currently own if they appreciate in value as your case progresses. At the Schwartz Bankruptcy Law Center, our dedicated attorneys and staff follow the latest developments to stay up to date with bankruptcy law, and you can be confident you are making the right decisions with our representation. Call 866-366-3328 today to schedule a risk-free consultation, or you can contact us through our website.

More Blog Posts:

Inherited IRA Retirement Accounts Not Exempt from Chapter 7 Bankruptcy, Kentucky Bankruptcy Lawyers Blog, published February 16, 2016.

Bankruptcy, Medical Bills, and the Effects of a Cancer Diagnosis, Kentucky Bankruptcy Lawyers Blog, published February 10, 2016.

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