High inflation and a rising rate environment have put the U.S. economy in a tough spot and financial institutions are starting to feel the pressure. Silicon Valley Bank — a start-up focused lender — went under in March, making it the largest bank to collapse since the financial crisis of 2008. Shortly after, Signature Bank became the third-largest bank to fail in U.S. history, worrying everyone about the effects of a new banking crisis.
If you have a personal loan or another type of loan and your lender goes under, you may be wondering how this affects your debt. The good news is that there’s not much to worry about, although here are some precautions you should take to protect yourself just in case.
What happens to your loans when your lender goes bankrupt?
Lenders can go bankrupt for a number of reasons, though the most common one is that they’ve become insolvent or are closely headed towards that path. Although this may sound alarming, the first thing you need to know is that if you have a loan — whether it’s a personal loan, student loan, mortgage or another type of loan — it won’t be affected by the lender going bankrupt. Your repayment term, interest rate and outstanding balance should all remain the same.
When a lender fails, whether it’s a bank or another financial institution, the first thing that happens is that its assets are sold in order to pay off creditors. Loans and other accounts are considered as part of those assets. That means your account will most likely be sold to another institution, which will then take over and manage your account just like your previous lender did.
In most cases, these accounts or assets are packaged and sold to the same lender. However, there’s also a chance that accounts are split among different institutions, so if you have more than one type of loan with the lender, it’s possible you end up with more than one creditor.
Regardless, both the defunct institution as well as the new lender will have to send you written notice, disclosing the details of the transaction. Once the transfer is completed, you’ll get another letter from your new lender — usually a month in advance before payments begin — with all the details of your new account, including your new payment due date and where to send your payments to.
Are debts forgiven if the lender goes bankrupt?
Although debts are a liability for you, they’re lender assets. When a lender files for bankruptcy, it must sell its assets to gain liquidity. So, no, your loans aren’t forgiven if your lender goes bankrupt. You’re still responsible for making payments, the only difference is that you’ll be sending payments to another institution instead of the one that originally gave you the loan.
What to do if your lender goes under
Lenders may sell your loans and other accounts to other institutions at any given time, even if they’re not going bankrupt. Though there isn’t anything you can do about it, you can take these precautions to protect yourself in case something goes amiss during the account transfer:
- Make sure your contact information is up to date. Having the correct contact information on file will ensure you get all important communications regarding your loan account, so you don’t miss any payments.
- Download and keep copies of your recent statements. Your loan terms, interest rate and outstanding loan balance should remain the same, even if you have a new lender. Still, having copies of your previous statements could be of help if some of this information gets mixed up during the transfer, as it serves as evidence of what your account should look like.
- Keep making payments as usual. Unless you’ve received your new account details from the new lender, you should keep making payments to your original lender, even if you’ve received notice that your account will be transferred soon.
- Keep tabs on your credit score. You may see your credit score drop by a few points when your loan switches to a new servicer, however, this will be temporary until payment history is established in that new account. If you see a sharp drop in your credit score and have been making payments as usual, that’s a sign that the payment may not have been received by the lender. If that happens, contact your new lender immediately, so they can help with this issue.
The bottom line
Learning that your lender has gone bankrupt can be nervewracking, however, there’s not much to worry about. The terms of your loan should remain unchanged, even if the account is being handled by a different institution. Just keep making payments as usual and be on the lookout for any communications that may come your way to avoid unpleasant surprises.
FAQs
Typically, as part of the bankruptcy process, another institution will take over the debt. The good news is that any repayments you already made won't get “lost” or wiped off the books. All of the information about your mortgage history will be transferred to the new financial institution or loan servicer.
What happens to your loan if the lender goes bankrupt? ›
So, no, your loans aren't forgiven if your lender goes bankrupt. You're still responsible for making payments, the only difference is that you'll be sending payments to another institution instead of the one that originally gave you the loan.
What happens to loans if business goes bankrupt? ›
You can discharge most SBA business loans in bankruptcy.
However, if the business fails, they find themselves on the hook for their SBA loan. Luckily, by filing for bankruptcy, you can discharge (eliminate) your obligation to pay back an SBA loan.
What happens to loans when a bank collapses? ›
Loans and other accounts are considered as part of those assets. That means your account will most likely be sold to another institution, which will then take over and manage your account just like your previous lender did. In most cases, these accounts or assets are packaged and sold to the same lender.
What happens if you have a loan and the company goes bust? ›
I have a debt with a company that has gone into administration, what should I do? Keep making payments towards your debt as normal. In most situations: The administration process does not affect the repayment term of your credit.
Do you still owe money if a company goes bankrupt? ›
Yes, even if a company is going bankrupt, you still have to pay what you owe them. Why? Just because a company is going bankrupt does not mean your debt is eliminated. If you have purchased goods or services from a company, you still owe them for what you received from them.
Do you have to pay your loan back if the bank collapses? ›
What happens to my loan now that my bank has failed? Either the FDIC sold your loan at closing or the FDIC has retained it temporarily. In either case, your obligation to pay has not changed.
Who gets money when company goes bankrupt? ›
Secured Creditors - often a bank, is paid first. Unsecured Creditors - such as banks, suppliers, and bondholders, have the next claim. Stockholders - owners of the company, have the last claim on assets and may not receive anything if the Secured and Unsecured Creditors' claims are not fully repaid.
What happens to home loans if economy collapses? ›
What Happens To Your Mortgage Rates & Payments? If you have a fixed-rate mortgage, then your monthly payments will remain the same, which can be beneficial in a high-inflation environment. However, if you have an adjustable-rate mortgage, expect your payments to increase.
What happens to my money in the bank if the economy collapses? ›
Your money is safe in a bank, even during an economic decline like a recession. Up to $250,000 per depositor, per account ownership category, is protected by the FDIC or NCUA at a federally insured financial institution.
Where to put money during a recession. Putting money in savings accounts, money market accounts, and CDs keeps your money safe in an FDIC-insured bank account (or NCUA-insured credit union account). Alternatively, invest in the stock market with a broker.
Do you get a payout if a company goes bust? ›
If your employer is insolvent. You can claim some of the money your employer owes you from the Redundancy Payments Service - this is a government service.
Can loan companies take your money? ›
Debt collectors can only take money from your paycheck, bank account, or benefits—which is called garnishment—if they have already sued you and a court entered a judgment against you for the amount of money you owe. The law sets certain limits on how much debt collectors can garnish your wages and bank accounts.
Can a finance company cancel your loan? ›
A loan can be flat canceled anytime during its life provided all the funds advanced by the finance company are returned to the finance company and all of the monies paid by the borrower are returned to the borrower.
Are mortgages forgiven in bankruptcies? ›
Chapter 7 Doesn't Wipe Out Mortgage Liens
Here's the part that some people find confusing. Even though a Chapter 7 bankruptcy discharge wipes out your obligation to pay back the loan, it doesn't eliminate the mortgage lien.
What happens to your credit card debt if the bank collapses? ›
Typically, your card transactions will not be impacted. After a buyer takes over your card account, it will notify you in advance of any changes to the terms of the account. In case the government doesn't find a buyer for the failed bank, a custodian would manage its accounts while it tries to sell them off.
