FTX Creditors May See Payments Soon, but Will It Be Enough?

• FTX’s reorganization plan could start compensating creditors under $50,000 by the end of 2024 if approved.
• Many creditors are pushing for in-kind payouts to avoid high tax liabilities from cash compensation.

The most recent FTX bankruptcy report discloses that the critical hearing to confirm the reorganization plan is set for October 7, 2024. If this strategy is approved, creditors with claims under $50,000 could begin receiving reimbursement by the end of 2024.

Meanwhile, larger claimants may have a longer wait, with payments due in the first or second quarters of 2025. This schedule is part of FTX’s larger effort to compensate creditors, with the exchange’s debtors planning to distribute $16 billion in compensation once the plan is approved.

FTX Creditors Push for In-Kind Payments Amid Tax Concerns 

FTX’s reorganization approach has been heavily scrutinized. Initially proposed in May, the proposal assumed that 98% of creditors would collect at least 118% of their claims in cash. The payments are set to begin within 60 days of court approval, which means that if the plan is approved by October 7, repayments could begin as early as December 7.

However, not all creditors agree with the current approach. Many people prefer in-kind assets to cash compensation because they are concerned about the taxable events that cash transfers might cause.

These creditors contend that acquiring cryptocurrency assets would more properly reflect their original holdings while avoiding unwanted tax consequences.

On the other hand, FTX’s legal team contends that cash payments are required to comply with Chapter 11 bankruptcy laws, despite opposition from creditors who feel in-kind distributions would better repair their losses.

Previously, according to CNF, Sunil Kavuri, who represents one of FTX’s creditor groups, added to the debate by stating that creditors may only receive 25% of their original cryptocurrency holdings. This lower payout is due to the claims being computed based on cryptocurrency valuations at the time FTX declared bankruptcy, when Bitcoin (BTC) was trading around $16,000.

In comparison, Bitcoin’s value has risen to $64,501, implying that creditors would miss out on considerable returns if paid in cash. For example, a consumer who lost 0.5 BTC would receive approximately $8,000 rather than the current worth of $32,250 if claims were reimbursed in full.

This circumstance has fueled calls for a rethinking of the payout strategy, with many saying that a more favorable conclusion should be considered, given the recent value gains.

Controversial Shareholder Payout Sparks Debate in Bankruptcy Case 

A recently revealed agreement by FTX’s debtors, which suggests transferring $230 million in government forfeiture revenues to preferred stockholders, is another problematic aspect of the reorganization process.

This document, which surfaced in a court filing on September 27, states that 18% of the forfeiture revenues will be set aside for shareholders, which appears to counter traditional bankruptcy processes in which creditors are typically prioritized over shareholders.

This clause has added another degree of complication to an already complicated bankruptcy procedure, causing additional discussion among stakeholders.

Rumors that FTX would start making distribution payments on September 30 have been discredited. The next court decision is critical, as approval of the restructuring plan is the determining factor for how and when creditors will be compensated.

While FTX creditors wait for a resolution, analysts predict that the payout process will infuse $5 billion to $8 billion into the cryptocurrency market, potentially acting as a bullish catalyst and increasing trading activity.

On the other hand, as we previously noted, FTX CEO Sam Bankman-Fried recently filed a 102-page appeal demanding a retrial, claiming that the judge handling his fraud and conspiracy case was biased, undercutting his defense.