[Jeondaegyu's 7 Wins 8 Losses] Is Debt from Cryptocurrency Dischargeable?

Mr. A, in his 30s, got involved in cryptocurrency last year. At that time, prices of Bitcoin, Ethereum, and others were experiencing a “skyrocketing” trend, and he heard stories from people around him who had earned several times their principal. At first, he invested with the money he had saved. Later, as prices rose, he began borrowing money to invest. However, since the beginning of this year, cryptocurrency prices have repeatedly “plummeted,” and Mr. A lost all his investment. The debt, with principal and interest, snowballed to 200 million won. Mr. A is trying to settle his debt through the court. Is it really possible?

Mr. A can consider personal bankruptcy proceedings and personal rehabilitation proceedings. If there is no steady income, personal bankruptcy proceedings can be used; if there is a steady income (such as a salaried worker), personal rehabilitation proceedings can be utilized.

Let’s look at personal bankruptcy proceedings. For Mr. A to be discharged through personal bankruptcy proceedings, he must pass two stages. First, the bankruptcy application must not be dismissed. If the bankruptcy application is recognized as an abuse of bankruptcy procedures, it will be dismissed. Whether the bankruptcy application constitutes abuse of bankruptcy procedures is judged by comprehensively considering all circumstances related to the exercise of rights, including benefits and disadvantages to creditors, debtors, and other interested parties caused by the bankruptcy procedure. Reasons for denial of discharge are also considered, but the possibility of discretionary discharge (discharge granted despite reasons for denial) is also a basis for judgment. In Mr. A’s case, since he borrowed a large sum at once to invest heavily in cryptocurrency, it may be considered an abuse of bankruptcy procedures, and the bankruptcy application could be dismissed. Although there is a possibility of a bankruptcy declaration due to the function of the bankruptcy system and the possibility of discretionary discharge, the likelihood is not high.

Even if a bankruptcy declaration is made, there must be no reasons for denial of discharge. If the debtor has significantly reduced assets through excessive gambling or has incurred excessive debts, discharge may not be granted. In Mr. A’s case, whether his actions constitute gambling may be an issue. Speculative trading itself is not problematic, but since he incurred debts significantly beyond his means, it can be seen as excessive debt burden. Mr. A’s cryptocurrency investment may be considered gambling, and discharge could be denied. Of course, even if it is considered gambling, there is room for discretionary discharge considering his financial ability, occupation, knowledge, etc., but the possibility is low.

Now, let’s look at the case of personal rehabilitation proceedings. If the application for commencement of personal rehabilitation proceedings is not made in good faith, the application may be dismissed. To dismiss the application on the grounds of bad faith, it must be recognized that the debtor applied for commencement of personal rehabilitation proceedings for an improper purpose, such as only aiming for the effects of the proceedings. Whether the debtor applied for commencement of personal rehabilitation proceedings for an improper purpose is judged by comprehensively considering all circumstances such as the background leading to the application, the scale of debt, timing of occurrence, and usage details. In Mr. A’s case, considering the investment background, debt scale, and timing, the application for commencement of personal rehabilitation proceedings may be dismissed. Although the possibility is low, if the personal rehabilitation proceedings are commenced, Mr. A can repay part of the debt according to the repayment plan and be discharged from the remaining debt.

In conclusion, debts incurred from short-term cryptocurrency investments like Mr. A’s are unlikely to be discharged through personal bankruptcy or personal rehabilitation proceedings. This is why young people’s investments in cryptocurrency need to be more cautious.

Jeon Dae-gyu, Chief Judge, Seoul Rehabilitation Court