Can I Protect Savings Bonds During a Bankruptcy?

When the United States needs to borrow money, it issues savings bonds through the United States Department of the Treasury. The bonds are generally considered safe investments, because the federal government guarantees the return of the bonds' principal and interest. While savings bonds may be fairly safe from default, they may not be safe from the bankruptcy trustee.

When you file bankruptcy, your savings bonds become property of the bankruptcy estate and subject to the trustee's control. All your assets, not just your savings bonds, become part of the bankruptcy estate when you file your case. The trustee is responsible for ensuring that you do not defraud your creditors, and the nonexempt assets in the estate are used to maximize your creditors' financial benefit. The more money the trustee recovers for your creditors, the more she gets paid; consequently, your savings bonds may be at risk.

Filing a Chapter 7 bankruptcy may place your savings bonds in jeopardy. If you meet Chapter 7's income requirement, it can be a reasonably quick way of stopping creditor collection efforts and voiding your personal liability for dischargeable debts. However, Chapter 7 is also known as liquidation bankruptcy. This is because Chapter 7 debtors generally must allow the bankruptcy trustee to liquidate certain assets, such as your savings bonds, and pay creditors with the funds.

Your state's bankruptcy exemptions can help keep some or all of your savings bonds protected from the trustee. An exemption is a law that protects various types and amounts of property during bankruptcy. Federal law governs bankruptcy. Nonetheless, you must refer to state, not federal, law to identify the best exemptions for your savings bonds, because Congress empowered the states to disregard federal exemptions and use their own.

If your state's exemptions inadequately protect your savings bonds, or you want to keep other valuable assets, and your state's exemptions won't give you the protection you need, consider filing a Chapter 13. Chapter 13 protects you from your creditor's collection activities without requiring you to give your savings bonds and other valuables to the trustee. Unlike the Chapter 7, which may be over in as little as four months, a Chapter 13 lasts up to five years. A Chapter 13 requires you to pay certain debts through a repayment plan as a trade for allowing you to keep your property.