Bankruptcy is a state where an entity or a person cannot meet its financial obligations, such as debt repayment to creditors upon legal declaration.

What Is Bankruptcy?

Bankruptcy is a state where an entity or a person cannot meet financial obligations, such as debt repayment to creditors upon legal declaration.

Cryptocurrency has made notable advancements and has been highly beneficial for investors. However, in the past few months, there have been some significant misfortunes, leading investors to ponder on the future of their crypto investments.

Is Cryptocurrency FDIC Insured?

Well, the ultimate answer to this is NO. Cryptocurrency is not insured by the Federal Deposit Insurance Corporation (FDIC). This translates to the investors not enjoying any FDIC perks if the crypto company they have invested in goes bankrupt. 

This also means that crypto investors risk losing their capital, and not a single government organization will back up their losses. Moreover, unlike a bank, the government guarantees no funds if the crypto firm gets defunct.

How Does Bankruptcy Impact Withdrawals?

Since the FDIC does not insure cryptocurrency, the most disastrous thing is when the investors cannot withdraw their hard-earned invested money from the bankrupt project. This means the masses' big share of the money has been wasted.

When Voyager filed for Chapter 11 bankruptcy protection, it stated that all the users would get their deposited USD amount, but it did not specify the cap of the returns. At the time of the bankruptcy proceedings, it said the company had $1.3 billion in cryptocurrency resources owned by customers.
After Voyager, Celsius also filed for bankruptcy protection in mid-July 2022. The official bankruptcy was filed after Celsius stopped all transactions, exchanges, and deposits between client accounts. As reported by them, they had almost $1.2 billion more in debt than they have in cash.

These two major cryptocurrency organizations' incidents have complicated things for investors. As a result, some people are now questioning whether they should invest their money in crypto. 

Investors should remember that if the crypto organization they invest in goes out of business, no government institution will be able to protect their funds. 

To learn more, read What Happens When a Crypto Exchange Goes Bankrupt?

Given Preferences in a Bankruptcy Case?

There is a defined line of command regarding who receives payment for the residual assets during the Chapter-11 bankruptcy procedure. As a result, investors may not lose everything, even if a corporation owes $1 billion more than it has in holdings.

Per Chapter 11, in addition to other financial information and reports, the bankrupt corporation must publish an organizational plan of assets and liabilities. The business, attorneys and bankruptcy court collaborate to determine who receives what throughout the bankruptcy process.

According to the law, secured creditors often receive the very first payments. After fulfilling such commitments, money is used to pay off debts owed to financial creditors. Investors come in last to receive their money when it concerns getting their money back. 

How to Recover Funds From a Bankrupt Crypto Firm?

Now that you won't be given any preference during bankruptcy as a retail investor, you might wonder what you could do to recover your funds from such a project. In most cases, if the project you have invested in goes out of business, it informs its investors immediately by the registered email address or contact number.

You must fill out the necessary forms and keep up with all the paperwork they need you to complete. Make sure you have entered the correct details while creating your account so that there won't be any hurdles if the project decides to return your money. Though there's a very low chance you get your crypto proceedings back, you might get some of your invested money. So, have patience and wait for the project (or its liquidators) to contact you.