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? ›
If your mortgage lender goes bankrupt, all of your loan terms remain exactly the same and you must continue making payments. The process of changing loan servicers is usually seamless, requiring only that you set up a new account and payment method; sometimes account details transfer over automatically.
What happens to loans when a bank collapses? ›
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 if you have a loan with a company that 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.
What happens when a finance company closes? ›
Your lender may continue to collect loan payments until all of their existing loans have been paid. In this case, you will continue to pay your same lender, but you won't be able to take out another loan with the same institution. Lenders often sell loans as a way to pay off creditors when they go out of business.
What happens when a loan closes? ›
The “closing” is the last step in buying and financing a home. The "closing,” also called “settlement,” is when you and all the other parties in a mortgage loan transaction sign the necessary documents. After signing these documents, you become responsible for the mortgage loan.
Do you lose all your money if a bank goes bankrupt? ›
For the most part, if you keep your money at an institution that's FDIC-insured, your money is safe — at least up to $250,000 in accounts at the failing institution. You're guaranteed that $250,000, and if the bank is acquired, even amounts over the limit may be smoothly transferred to the new bank.
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.
Can banks seize your money if the economy fails? ›
It indicates an expandable section or menu, or sometimes previous / next navigation options. 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.
Is your money protected if a bank collapses? ›
FSCS will pay compensation within seven working days of a bank or building society failing. You don't need to do anything, FSCS will compensate you automatically. More complex cases, including temporary high balance claims, will take longer and you'll need to contact us to request an application form.
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. You can claim: up to 8 weeks' unpaid wages.
What happens if a business can't pay back a loan? ›
If you can't repay your small-business loan, it may fall into default. A business loan default can have a range of negative consequences, from losing your personal assets to bankruptcy.
Can a loan company sell your loan? ›
Yes. Federal banking laws and regulations permit banks to sell mortgages or transfer the servicing rights to other institutions. Consumer consent is not required. However, the bank or new servicer generally must comply with certain procedures notifying you of the transfer.
What happens to loans when banks fail? ›
If your bank fails, any loans you have with it -- such as auto loans or personal loans -- will be sold to a new lender, and you'll make payments to that lender.
What happens to a business loan if the business closes? ›
If your loan is backed by collateral, like your business equipment, the lender may take that equipment to recoup some of the money you owe. If your business has failed, you may be able to cover the amount of money you owe by selling off your assets, since you no longer need them to run your business.
What happens to your debt when a company goes out of business? ›
If a business goes bankrupt and owes you money, your debt is listed with all other debts according to a specific scale. That scale determines the order in which debts are to be paid. Typically, bankruptcy debt is determined to be preferential, secured or unsecured, in that priority order.
What happens if my creditor goes bankrupt? ›
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. If it is a personal loan, credit card company, auto loan, or home loan, of course, you have to pay it back.
What happens if you take out a business loan and go bankrupt? ›
You can discharge most SBA business loans in bankruptcy.
Luckily, by filing for bankruptcy, you can discharge (eliminate) your obligation to pay back an SBA loan. But keep in mind that if you pledged any of your assets as collateral for your loan, bankruptcy will not wipe out the lien on that property.
What happens to mortgaged properties when you go bankrupt? ›
Your lender still has a right to the property if the debt isn't paid. So basically, you don't have to pay your mortgage. But if you don't, you will lose your property because your lender will likely enforce the lien they have.
Can you get your money back if a company goes bankrupt? ›
Though the bankruptcy of a company to which you've sold goods or provided services is never great news, it's often possible to get back at least some of what you are owed. Doing so requires you to file a proof of claim promptly, so the trustee overseeing the payment to creditors can put your receivables in the queue.
