Future.

Bankruptcy laws have existed since way before crypto burst onto the scene. However, courts can still apply old rules to new technology. When someone files for Chapter 7 bankruptcy, the court may claw back certain transactions, especially if they look like an attempt to hide assets.

If a person transferred or withdrew crypto before filing, those funds could be pulled back into the bankruptcy estate. Courts can use blockchain records to find hidden funds and recover money for creditors.

How Does Crypto Clawbacks Work in Bankruptcy?

In Chapter 7 cases, courts focus on transactions made before bankruptcy. If a debtor moved assets within 90 days of filing, the court may deem it a preferential transfer under Section 547 of the Bankruptcy Code. If the transfer was done to cheat creditors, it could be labeled a fraudulent transfer under Section 548.

Since crypto transactions are recorded on the blockchain, financial experts can trace where the money went. Courts then decide if those assets should be returned to the bankruptcy estate.

What Are Some Challenges in Recovering Cryptocurrency?

Crypto clawbacks aren’t as simple as recovering cash. Some of the legal questions include:

• The Owner of the Crypto: Did the debtor keep crypto in a custodial exchange? If so, courts may decide the funds weren’t really theirs and, therefore, cannot be clawed back.
• The Crypto Worth: Since crypto prices fluctuate, courts must decide if the clawback returns the original coins or their value in U.S. dollars.
• Date of Transfer: If a smart contract automatically moved crypto, the court must determine when the transfer legally happened.

How Do You Defend Yourself Against Clawbacks?

If you are facing a clawback claim, your defense might include:

• Ordinary Course of Business: If the transfer was a normal withdrawal, it might not count as a clawback.
• Safe Harbor Protection: If crypto is classified as a security or commodity, certain transactions could be exempt from clawbacks.
• No Fraudulent Intent: The bankruptcy trustee must prove the debtor moved assets to cheat creditors, which isn’t always clear.

If you’re involved in a bankruptcy that includes digital assets, please consider getting legal help. Contact O’Brien Law Firm, LLC, today to discuss your case and protect your financial future.