What if a borrower files bankruptcy? It is a violation of the Bankruptcy Code for a creditor to take certain actions against a borrower while the borrower is insolvent or in bankruptcy. For example, the Compound Finance contract’s automatic liquidation of a borrower’s account (if the borrow limit is exceeded, etc.), while a borrower is insolvent or in bankruptcy, could be such a violation. Is there something in the contract to address this? Or does the Compound Finance team have any thoughts on how this will be handled?
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Not sure how a borrower can go bankrupt. also compound doesn’t have automatic liquidation. please explain to me.
There’s no forced/automatic liquidation? I was thinking of a situation like a forced sale of a home, where the homeowner files Chapter 13 just before the forced sale. The bankruptcy forces an automatic stay on all collection activities, including forced sales. If the bank tries to sell the home after a bankruptcy has been filed, it faces serious consequences such as fines, stripping the mortgage from the property, etc. A Compound borrower who has supplied a significant amount of crypto assets as collateral, and who is on the brink of being liquidated because of surpassing the borrow limit, may become desperate enough to try a Chapter 13 bankruptcy strategy to prevent the liquidation. I understand no one can stop a decentralized contract from performing acts that are built into the contract. However, the desperate borrower may try to come after people associated with Compound (programmers, founders, etc) and accuse them of violating the Bankruptcy Code’s automatic stay.
If the file chapter 13 not sure how that would even apply to crypto, as the government can’t do anything about it if they are over their borrow limit they will probably get liquidated and that’s it
They could prevent by just repay their borrow or adding more collateral.
Also the team literally can’t do anything about it so they would lose a bunch of money in court and anyways all the judges are grandpas who fail to understand how to send a text and ask for a lunch break every 5 minutes
That’s the whole point of filing bankruptcy - in case the borrower cannot repay or add more collateral for some reason, he/she can use bankruptcy to protect their assets from forced sales and liquidations. Once you file bankruptcy, ALL of your assets (including crypto) come under the control of the bankruptcy trustee, and no one is allowed to sell any of the borrower’s property during the proceedings.
True, the team can’t do anything about the liquidation. That’s why I’m bringing this up, because it’s not likely the bankruptcy trustee will be satisfied with the excuse “it’s a decentralized app, and there was no way to stop the liquidation.” What the bankruptcy court might do is order someone from Compound to give the assets back to the borrower, even if that means money comes out of the Compound team’s pockets.
Let me preface this with: I am not qualified to give anyone advice of any kind in any jurisdiction.
tldr: I don’t think filing BK has any impact on someone’s borrowing position with Compound.
I would look at borrowing from Compound as similar to borrowing from your stockbroker on margin. As far as I know, filing bankruptcy does not prevent brokers from liquidating your stock collateral to repay your margin debt. However, if you still owe the broker more money after they have sold your collateral, they could typically sue you to recover the deficiency balance. Bankruptcy MAY prevent brokers from doing this. Compound already doesn’t take any additional action beyond collateral liquidation, so I don’t think BK filing would impact a Compound borrowing position.
Thank you. That makes sense.
hehe they will be satisfied cuz the team is a good team and wont give a random person money just because they filled for bankruptcy to not get liquidated. If they get perused in court, guess who wins? A team who no longer has control of a protocol or some person who isn’t backrupt (cuz they have collateral) and filing to avoid something. and how exactly is the government going to take out the collateral if they physically cannot? The person who uses compound acknowledges that the team can’t do anything about their assets. tl;dr, i agree with @monet-supply
Thank you for trying. But it’s clear you don’t understand the power of the Bankruptcy Court. Good luck to you, though.