(Reuters) - MBIA Inc on Monday said it had changed the terms of some of its debt to avoid what it called a possible default, sending its shares up more than 5 percent in afternoon trading.

The bond insurer proposed the changes on Nov. 7 to eliminate the risk that it might be considered in default if a troubled insurance unit were put into rehabilitation or liquidation by the New York State Department of Financial Services.
MBIA said at the time that if there were such a default, it would have insufficient liquidity to make good on the notes and would probably immediately pursue other actions, including bankruptcy.

Bank of America Corp, which is tangled in legal disputes with MBIA, offered on November 13 to buy some of the insurer's bonds to thwart the changes to the terms. At the time, the offer sent MBIA shares down more than 19 percent. Bank of America said it believed the changes would increase the risk of MBIA's insurance unit being placed in rehabilitation or liquidation. That would jeopardize all policyholder claims, including Bank of America's, it added.

In a statement on Monday, Bank of America questioned MBIA's use of its own cash to help win bondholder approval for the change in terms. MBIA said it paid $10 for each $1,000 in principal that gave its consent and repurchased $170 million in debt from holders that had consented.

"MBIA is using its resources to buy back its own bonds to gain consent, instead of honoring its obligations to its policyholders," the bank said in a statement.

The bank said it will continue to pursue all of its options "to protect our interests as a policyholder and attempt to ensure that MBIA fulfills its financial obligations to all policyholders," including "billions of dollars" the bank believes it is owed under MBIA insurance policies.

In their ongoing legal disputes, MBIA claims that Bank of America owes it billions of dollars over soured mortgages that it wants the bank to buy back. Bank of America says the insurer owes it billions over certain credit default swap transactions.

Shares of MBIA were up 5.6 percent at $8.83. Bank of America fell 0.5 percent to $9.85.