A bankruptcy bond is a legally binding contract between three parties:
- The court that orders the bond and establishes the required bond amount is the “obligee.”
- The bankruptcy trustee ordered to purchase the bond is the “principal.”
- The bonding company that underwrites and issues the bond is the “surety.”
Any malfeasance by the principal, such as embezzlement, theft, or other misappropriation of funds that causes a creditor or other beneficiary to experience a financial loss can lead to a claim being filed against the bond. The terms of a bankruptcy bond legally obligate the principal to pay all valid claims up to the required bond amount (known as the bond’s “penal sum”). To ensure prompt payment to the claimant, however, the surety typically will pay a claim upfront and then be repaid by the principal for the resulting debt.
What Do They Cost?
The annual premium for a bankruptcy bond is a small percentage of the bond’s penal sum. The court will establish that amount based on the value of the assets the principal will be managing as a trustee. The premium rate, however, is determined by the surety at the time the bond is purchased by the principal.
The surety’s main concern is the risk of not being repaid for claims paid on behalf of the principal. Consequently, the underwriters will look closely at the principal’s creditworthiness, as indicated by his or her personal credit score.
With good credit, the premium rate for a bankruptcy bond should be in the range of one to three percent.