Popular payment apps like Cash App, Venmo, and PayPal make transactions quick and easy, whether it’s paying for dinner, ordering something online, or collecting rent from roommates. Millions of people use these payment platforms in everyday life, even if they’re riskier than traditional banking.
An experienced bankruptcy attorney can describe how banks and bankruptcy courts treat the contents of digital wallets. If you’re considering filing for bankruptcy, it’s important to understand how these accounts work and how the courts treat them. The implications may surprise you.
Six Key Things to Know About Digital Payment Platforms
When friends and colleagues start using digital accounts, it’s easy to adopt the technology without considering what might go wrong. Consider the following scenarios:
- If you maintain a balance in a digital app your funds are usually not protected by insurance the way a traditional bank deposit is. Traditional bank accounts are insured by FDIC for up to $250,000, but non-bank payment platforms like Cash App, Venmo, and PayPal provide insurance only under specific circumstances, such as if they hold pooled money in an FDIC insured bank and if the account structure is covered. If something goes wrong with the app or its parent company, including bankruptcy, there are few guarantees that your funds will be repaid or replaced.
- If you apply for bankruptcy, it’s critical to list any funds in a payment app as assets. The courts treat digital balances as regular financial accounts, so they must be included on your bankruptcy petition, even if the balance is small. Some attorneys advise listing the existence of zero balance accounts, too, just to comply with legal requirements. The bankruptcy court may also require the transaction history from each account, just as they do with bank statements. Transparency is important as failure to comply with all of the requirements of a bankruptcy petition may result in serious consequences, including charges of fraud.
- Losing access to digital payment platforms during bankruptcy is not uncommon. Funds held in any account become part of the bankruptcy estate when a person files. The bankruptcy trustee may freeze the account, order that the contents be used to pay debts, or order that it not be used for a period of time. The parent company of the app may also suspend the account if a bankruptcy trustee freezes the bank account linked to it.
- Digital wallets are not exempt by default. In bankruptcy, specific guidelines apply to exemptions (such as retirement accounts, essential household goods, and certain amounts of equity in a primary home). It’s unlikely a court will accept the balance in a digital wallet as an exempt retirement account.
- You can continue to use a digital wallet during bankruptcy unless the trustee specifically forbids it. Unlike a credit card, digital wallets function transfer funds, so you can only pay for things if the balance in your wallet or linked account allows. Your account will be shut down by the app owner due to bankruptcy unless they have extended credit to you and an outstanding balance is discharged by the court.
- Good financial hygiene may ease your financial difficulties. Learn about digital wallet apps so that you understand how your money is treated in the case of the company’s financial failure. Transfer balances to a traditionally-insured bank account for safekeeping and recognize that the courts count digital wallets as regular assets.
Get Guidance for a Bankruptcy Petition
The legal experts at Lam Law Firm can counsel you about your bankruptcy options, including how the courts handle digital assets. Understanding how they fit into bankruptcy proceedings and how to manage the accounts wisely can help protect your financial interests during a difficult time. Contact Lam Law Firm for a consultation today.
