What Happens to a Certificate of Deposit if the Lender Files Bankruptcy?

A certificate of deposit is a financial instrument known as a time deposit that's primarily issued by banks and other financial institutions. Certificates of deposit represent assets to to the lenders, and debt obligations to the bank or institution borrowing the funds. When the lender files bankruptcy, the lender may lose control of the certificate of deposit.

Certificate of Deposit

A certificate of deposit is an agreement whereby the lender deposits money, typically with a bank or other financial institution. In exchange for a promise to leave the money on deposit with the financial institution for a predetermined period of time, the financial institution repays the lender both the principal and interest at the end of the predetermined holding period. Since a certificate of deposit is an asset of the lender, when the lender files bankruptcy, the type of bankruptcy filing determines the disposition of the certificate of deposit.

Chapter 7 Bankruptcy

A Chapter 7 bankruptcy is a bankruptcy covered by Chapter 7, Title 11, of the United States Bankruptcy Code. Chapter 7 bankruptcy is a liquidation bankruptcy where the nonexempt assets of the debtor are sold to repaid the debtor's creditors. Generally, when a debtor holding a certificate of deposit enters into Chapter 7, the certificate of deposit is sold or redeemed at the financial institution, and the proceeds from the sale are used to repay the debtor's creditors.

Chapter 13 Bankruptcy

Under a bankruptcy covered by Chapter 13, Title 11, of the United States Bankruptcy Code, a plan for repaying the debtor's creditors is formulated. The debtor then follows the plan and eventually emerges from protection under the bankruptcy plan. This is known as a reorganization bankruptcy. A debtor holding a certificate of deposit isn't required to sell or redeem the certificate of deposit unless a sale is expressly proposed in the bankruptcy plan. Under a Chapter 13 bankruptcy, the certificate of deposit holder typically holds the certificate of deposit until maturity.

IRAs and Retirement Plans

An exemption exists whenever the certificate of deposit is held within a formal retirement plan or Individual Retirement Account, or IRA. Assets held within formal retirement plans and IRAs are considered exempt assets under U.S. bankruptcy law and can't be claimed and sold to repay creditors.

References

• United States Courts: Chapter 7: Liquidation Under the Bankruptcy Code
• "Financial Institutions Management"; Anthony Saunders, Marcia Millon Cornett; 2008
• United States Courts: Chapter 11: Reorganization Under the Bankruptcy Code
• United States Courts: Chapter 13: Individual Debt Adjustment
• United States Courts: Bankruptcy Basics