Key Takeaways
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If a bank fails, your loans are unaffected and your funds are protected by the FDIC.
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If a lender goes bankrupt, your loan may be transferred to another institution, but you will still be responsible for making payments.
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To protect yourself, make sure your contact information is current, keep copies of your statements, and continue making payments as usual.
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If your credit score drops after your loan has been transferred, contact the new lender to avoid potential problems.
If you have a personal loan or another type of loan and your lender goes bankrupt, you may be wondering how this will affect your debts. The good news is that you don’t have much to worry about, although you should take some precautions to protect yourself just in case.
If a bank goes bankrupt, what happens to its loans?
The first thing you need to know is that if you have a loan, it will not be affected if the lender goes bankrupt. Your repayment term, interest rate, and outstanding balance should all remain the same.
The most important thing, says Karen Bennet, senior consumer banking reporter at Bankrate, is that your money will be protected.
When a federally insured bank fails, the Federal Deposit Insurance Corp. (FDIC) takes over the bank. The bank is then sold or dissolved, but your money is protected as long as you stay within established balance sheet guidelines. When a bank fails, the FDIC guarantees that your insured deposits will be returned within two business days.
– Karen Bennet, senior consumer banking reporter for Bankrate
This is what happens when a lender goes bankrupt, whether it’s a bank or another financial institution.
1. Its assets are being sold
The assets are sold to pay off creditors. Loans and other accounts are considered part of these assets. This means that your account will most likely be sold to another institution, which will then take over and manage it, just as your previous lender did.
In most cases, these accounts or assets are packaged and sold to the same lender. However, there is also a chance that accounts will be divided among different institutions. If you have more than one type of loan with the lender, it may end up with more than one creditor.
2. You hear from the new lender
Both the defunct institution and the new lender must send you a written notice detailing the details of the transaction.
Once the transfer is complete, usually a month before payments start, you will receive another letter from your new lender. This will contain all your new account details, including your new payment date and where to send your payments.
Are debts forgiven if the lender goes bankrupt?
Although debts are a liability to you, they are the lender’s assets. When a lender files for bankruptcy, it must sell its assets to obtain liquidity. So no, your loans will not be forgiven if your lender goes bankrupt. You are still responsible for making payments. The only difference is that you send payments to a different institution instead of the institution that originally gave you the loan.
You still owe the money even if a bank goes bankrupt
While your credit union’s failure will change where your payments are sent, it doesn’t change the importance of paying off your loan. It is not a valid excuse for missing loan payments. Doing so could lead to default on your personal loan.
What to do if your lender goes bankrupt?
Lenders may sell your loans and other accounts to other institutions at any time, even if they don’t go bankrupt. Although there’s nothing you can do about it, you can take these precautions to protect yourself in case something goes wrong during the account transfer:
- Make sure your contact details are up to date: Having the correct contact information will ensure that you receive all important communications regarding your loan account and don’t miss any payments.
- Download and save 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, it can be helpful to have copies of your previous statements if some of this information gets mixed up during the transfer, as it serves as proof of what your bill should look like.
- Continue paying as usual: Unless you have received your new account information from the new lender, you will need to continue making payments to your original lender even if you have received notice that your account will be transferred soon.
- Keep an eye 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 the payment history is recorded in that new account. If you see a drop in your credit score despite making payments as usual, it’s a sign that the lender may not have received the payment. If that happens, contact your new lender immediately so they can help you with this problem.
The bottom line
It can be unnerving to hear that your lender has gone bankrupt, but you don’t have to worry much about it. The terms and rates of your personal loan should remain unchanged, even if another institution manages the account. Just continue paying as you normally would and pay attention to any communications you encounter to avoid any unpleasant surprises.
