Understanding Bail Bond Collateral
Often, bail bond companies will attempt to transact a bail bond without the use of collateral. However, if the risk is too high, a bail bondsman will require collateral in order to post bail. This is needed to protect the bail bond company from potential loss. This article will discuss different types of collateral typically utilized in bail bond transactions.
Conventional Types of Bail Bond Collateral:
For bail bonds, real estate is the most common type of collateral. The bail bond company puts a lien on the real estate until the bail bond has been exonerated (finished). Once the bail bond is exonerated, the bail bond company can file documentation that will essentially dissolve the lien.
While real estate is a strong form of collateral for most bail bonds, there is some risk involved for the bail bond company such as property devaluation or a legal dispute. Another problem is if, after a legal dispute, the person who signed for the bond is not the real owner of the property. All these risks will be considered by the bail bond company when assessing whether or not to accept a specific property as collateral. Despite the risks mentioned, bail bond companies still favor utilizing real estate as collateral.
Cash is the most secure form of all collateral types. Normally, the customer will simply conduct a wire transfer of funds to the bail bond company. Alternatively, the customer can present a cashier’s check to the bail bond company. One of the benefits of using cash is that it’s easy to understand by all parties.
Irrevocable Letter of Credit
An Irrevocable Letter of Credit (ILOC) is a letter written by a bank. The letter specifically states that the bank is guaranteeing the conditions of the bond to the bail bond company. An ILOC can be difficult to obtain by the average person. Generally, you need a very strong relationship with the bank for the bank to issue an ILOC.
Brokerage account (non-retirement)
Individuals often maintain personal investment accounts that are generally made up of stock, bonds, and other investments. Usually, an individual does not want to liquidate these investments, but would instead like to use the existing investments as collateral for the bail bond. One alternative is that your bank could issue an Irrevocable Letter of Credit (ILOC) using your brokerage account as collateral. Some financial institutions may allow securities based lending, a process wherein a loan is taken on the securities to be used as collateral. This can often be finalized in just a few days. It’s best to contact your financial institution to discuss possible options. Each financial institution has particular rules and programs that they follow.
In limited situations, some surety bond companies may accept credit cards as collateral. By using the credit card method, a “hold” is placed on the credit card; similar to the type of “hold” that a hotel utilizes for a reservation. The “hold” does not appear on the card holder’s monthly statement, nor is there interest charged to the cardholder. The “hold” can remain in place for months, even years.
Automobiles, computers, jewelry, and other personal effects are generally sub-par collateral. There are multiple pitfalls associated with utilizing personal items as collateral. For example, who is responsible if it’s damaged? Where will the personal item be stored? Who will pay for storage? What about appraisal disputes? What if the item is stolen? Who is the real owner of the personal item?
401K / IRA / SEP Plans and other Retirement Accounts
The IRS does not allow the use of retirement accounts as collateral.
For bail bond transactions, the most common form of collateral is real estate. Utilizing other methods of collateral are generally explored on a case-by-case basis. Bail bond companies will usually try to exhaust other options prior to mandating collateral. Bail bond agents are trained in determining risks associated with a particular bond. Here are some typical questions a bail agent might ask to determine the risk of a particular bail bond:
- How long has the defendant lived in the area?
- Is the defendant originally from another country?
- Is the defendant employed?
- Is the defendant married? Kids? Other family in the area?
- Criminal history?
Another method to determine risk is to review a credit report. While not perfect, a credit report does say a lot about a person’s financial responsibility and general stability. Those with higher credit scores may potentially side-step the need for collateral.
Depending on the type of bond, the bail bond company might also be interested in seeing the Principal’s financial statements to determine net worth.
Generally, the first step when qualifying a customer is a review of their credit report. Those with favorable credit scores will usually receive better collateral requirements. The bail bond company may also be interested in seeing financial statements (balance sheet/ income statement) to determine financial capacity. Also, bail bond companies may be interested in the Indemnitors specific industry experience and competence. Once the underwriter has reviewed the aforementioned items, they can determine the necessity of collateral.
About the Author: Greg A. Rynerson, CPCU is President of Surety Bond Authority, Inc. which is a mid-sized surety bond company that handles all types of surety bonds (including court bonds, construction bonds and licensing bonds). We welcome any questions regarding your surety bond situation. Visit our website for more information.