Crypto Investors Get A Crash Course In Bankruptcy Proceedings

The recent bankruptcies of the cryptocurrency trading and lending firms Voyager Digital Holdings, Inc. and Celsius Network LLC are giving many Milwaukee area residents a crash course in bankruptcy. Both firms froze their users’ accounts, and everyone wants to know if and when they will get their money back. 

Hanson & Payne is monitoring these cases because there are many people and businesses in Milwaukee investing in crypto, who are impacted by these cases, or may be involved in similar cases in the future. Our firm often represents creditors in bankruptcy cases, and we are curious if crypto creditors will be protected during bankruptcy proceedings since one of the selling points of crypto is that it is outside the traditional financial system. 

In a Typical Bankruptcy, Creditors Get Paid Back Based on Priority  

When a company declares bankruptcy, the court must figure out who gets what when any assets are distributed. 

The first debts to be paid back are those secured by a specific asset that was pledged as collateral. For example, say a business took out a loan to buy new equipment, and used its building as collateral. If the company declares bankruptcy, the creditor on the equipment loan will likely be able to claim the building during the bankruptcy case. 

If an asset has multiple liens against it, the court will look at the order in which the creditors contracted with the debtor. The first in time is typically the first in line for payment. 

The next set of creditors to be paid are those with unsecured claims against the entity that filed for bankruptcy. The court determines which of these creditors will get paid back by looking at each debt and determining its importance. The official name for this ordering of debts is priority. 

The higher the priority a debt is, the more likely it gets paid back. Claims that are higher priority are paid in full before claims considered lower priority receive anything. The priority of various claims is dictated by the Bankruptcy Code. 

The court will look through the documents each creditor has to figure out the debt’s priority, and other details like the amount owed. A creditor must have documentation to back up any claim they make against the debtor. 

Hanson & Payne often works with Milwaukee area businesses and lenders who are creditors in bankruptcy cases to document their claims and present them to the court. 

Figuring Out if Crypto Investors Have Priority

It is clear from the letters being written to the judges overseeing the Voyager and Celsius cases that the users of these services assumed the money they deposited was secure and could be withdrawn at any time, no matter what. It is now clear that that was not true. 

In fact, Celsius’ terms of use state that any funds deposited with the firm “may not be recoverable” in the event of bankruptcy. This means it is likely that users will be considered creditors of the lowest priority. They will likely get back pennies on the dollar if they are able to get any money back at all. 

Milwaukee Area Bankruptcy Lawyers You Can Trust

Hanson & Payne’s experienced team of bankruptcy attorneys have spent years representing creditors in bankruptcy cases, but we have never seen anything quite like these crypto bankruptcies. We are keeping an eye on them, and waiting to see if cases like this end up inspiring policymakers to amend our nation’s bankruptcy laws. 

If you are a Milwaukee area resident or business with questions about the rights of creditors during bankruptcy, please don’t hesitate to reach out.