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The unknown victims of Puerto Rico's historic bankruptcy

  • Puerto Rico's bonds were a popular way for people in the U.S. territory to save for retirement.
  • Judge Laura Taylor Swain, the federal judge in N.Y. who oversees the island's massive bankruptcy process, ordered that the $16 million interest payment due to Cofina bondholders on June 1 be held by the trustee.
  • The judge's decision to freeze the payments is already being felt on the island.

The battle to recoup pennies on the dollar of Puerto Rican bonds has been epitomized by Wall Street's most prominent hedge-fund managers.

But siding with them are the unsuspecting Puerto Rican residents, who piled into the securities just as hungrily.

On an island with half the population in poverty, many are seeing their saving accounts wiped out, with thousands of dollars in losses.

Socorro Olivencia and her husband Juan Sanchez.
Dawn Giel | CNBC
Socorro Olivencia and her husband Juan Sanchez.

Socorro Olivencia, a retired business consultant with a Ph.D. in Industrial Organizational Psychology, and her husband, Juan Sanchez, bought their Cofina bonds back in 2007, when they were looking for long-term saving options.

Olivencia, 68, described the Cofina security as "the best bond at the moment." The government was strong, she said, and the couple looked at the bonds as a secure way to save for their retirement.

The bonds that Socorro and Juan purchased have lost $150,000 of their value to date and are set to mature in 2044.

Maria Colon, a 51-year-old single mother with fibromyalgia, relies on interest payments from Puerto Rican Cofina bonds as her main source of income due to her disability. She said she is now facing nearly $600,000 in losses to date on her investments in Cofina and various other Puerto Rican bonds.

For resident bondholders relying on interest payments like Colon, the situation looks grim.

A recent decision by Justice Laura Taylor Swain, the New York federal judge overseeing the island's massive bankruptcy process, ordered that the $16 million interest payment due to Cofina bondholders on June 1 be held by the trustee until a decision is made as to which bondholder group has the legal right to that money.

Judge Swain's decision to freeze the payments is already being felt on the island.

Puerto Rico's bonds were a popular way for people in the U.S. territory to save for retirement — they carried a triple tax exemption with yields, far above what a bank would offer even in high-yield savings accounts.

Jorges Arenas.
Dawn Giel | CNBC
Jorges Arenas.

People like Jorge Arenas, 62, looked at the bonds as a way "to do something to help the island, to give back" to the Puerto Rican community.

After purchasing the bonds, Jorge and his wife, a financial analyst, would review their investments annually and started to see signs of economic turmoil on the island long before the first debt default in August 2015.

Jorge credits his wife for the decision to ultimately sell all of their Puerto Rican bond investments in 2009 and 2010.

Francisco Briganty, a 72-year-old retiree, paid par value for the $375,000 he invested in Puerto Rico's government bonds. Briganty had purchased the bonds through a local broker using his personal savings that he had accumulated over his more than 35-year career in the pharmaceutical industry.

The value of that investment has been slashed by nearly 50 percent.

"I believe I am speaking for a lot of people my age who are retired," Francisco said. "They have paid their money into the government, and now we are losing everything."

Watch: Gov. of Puerto Rico on statehood