If You Go Bankrupt Can Your Debtors Take Your Savings Bonds and Cash Them In?

When you declare bankruptcy, you stand to lose a tremendous amount of your personal wealth. Your secured creditors, including your mortgage lender and auto loan provider, will seize the assets to which they're entitled under the terms of your loan agreements. Your unsecured creditors, including your credit card issuers, are likely to take the bulk of what remains of your usable assets. They may take any pieces of property that you've put up to back your unsecured loans as well.

When putting up collateral for a loan, you'll probably choose from a limited selection of high-value assets. These might include your home, vehicles, furniture items and jewelry. Crucially, you can't use an encumbered asset as collateral. If the value of your home is smaller than the amount that you owe on its mortgage, it is worthless as a piece of collateral.

Savings bonds are rarely used as collateral. Although they do increase in value as they approach maturity, they lack the liquidity that characterizes more attractive financial instruments. In fact, creditors generally consider them to be unattractive substitutes for cash loans or secured credit facilities like mortgages or auto loans.

However, the savings bonds that you don't put up as collateral are likely to be treated as cash during your bankruptcy. You'll lose these instruments once your secured creditors have been satisfied and your unsecured creditors line up to seize your remaining cash and assets. After your creditors have seized your outstanding savings bonds, they may either cash them immediately or hold them until maturity. Their decision is likely to turn on the bond's maturity date and their own needs for liquidity.

Your home state's property exemption laws may permit you to shield some or all of your savings bonds from your creditors. While property exemption laws vary by jurisdiction, they exist in all 50 states as well as the District of Columbia.

In some states, your property exemptions may be governed by rigorous limits on the type and value of the items that you choose to shield from your creditors. For instance, you may not be able to exempt vehicles worth more than $5,000 or real property worth more than $150,000. However, some other states' property exemption laws follow "wildcard" rules that permit you to choose which types of property to exempt. In these states, you may be able to protect your entire portfolio of savings bonds.

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