If you live in one of the many parts of the country with lower-than-average housing inventory, you may be considering constructing your own home from the ground up rather than paying what you fear is a too-high price for a home that doesn't completely fit your family's needs. While this can often be the best way to buy your dream home, this dream can quickly turn into a nightmare if your contractor abandons the project or runs into financial trouble before your home is finished. Read on to learn more about your options if you fear your general contractor (or a subcontractor) is nearing bankruptcy before the completion of your home.

What happens when a contractor declares bankruptcy?

General contractors (GCs) are responsible for arranging and paying for the services of subcontractors (or the GCs own employees); therefore, a financial hiccup on your GC's end can mean no payments to subcontractors, who may quickly abandon the work they've been doing once they realize they won't be compensated for it.

Although you'll almost always be legally entitled to the refund of any money paid to your contractor for work that hasn't yet been completed, being entitled to this money and actually getting this money from a GC who has filed for bankruptcy protection can be two very different things. In many cases, your claim may be placed behind those of secured creditors (like lenders who have extended credit to your GC for the purchase of machinery or equipment) and others to whom your GC owes money.   

What are your options if you're worried about your GC's financial solvency?

Selecting a contractor who has a surety bond can go a long way toward eliminating any financial strain caused by a defaulting or bankrupt GC. This contractor surety bond essentially acts as insurance against default or disaster; in exchange for a small payment by the GC, the company extending the bond promises to cover any damages resulting from the GC's own actions. 

Not only can a surety bond compensate you for loss of the non-refunded monies you've already paid your defaulting GC, it can help pay for the services needed to finish the construction of your home. Because arranging for a new GC mid-project (along with rescheduling the work being performed by subcontractors) can be a hassle, a surety bond is a great way to ensure you're fully covered no matter what happens to your GC.