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
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 your loan if bank fails? ›
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 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 my reverse mortgage if my lender goes bankrupt? ›
That's not going to happen. Even if the mortgage company itself goes out of business, they will have sold the loans to another company. The bill comes due and it must be paid. A reverse mortgage is just a deferred-payment home equity loan.
Do you have to pay back loans if you go bankrupt? ›
After a bankruptcy, the debtor is no longer legally required to pay any debts that are eliminated, or discharged, in bankruptcy court. Collectors cannot collect on the debts that have been discharged.
Do you have to pay your loan back if the bank collapses? ›
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. Within a few days after the closure, you will be notified by the FDIC, and by the purchaser, as to where to send future payments.
Are mortgage companies in trouble? ›
While mortgage lenders do continue to report losses, there have been improvements during the past two quarters. In Q1 2023, the reported loss per loan was $1,972, and those originated in Q4 2022 reported a loss of $2,812 per loan, according to the Mortgage Bankers Association.
Can banks seize your money if economy fails? ›
Banking regulation has changed over the last 100 years to provide more protection to consumers. You can keep money in a bank account during a recession and it will be safe through FDIC and NCUA deposit insurance. Up to $250,000 is secure in individual bank accounts and $500,000 is safe in joint bank accounts.
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.
Who pays debts after bankruptcies? ›
The debts discharged vary under each chapter of the Bankruptcy Code. Section 523(a) of the Code specifically excepts various categories of debts from the discharge granted to individual debtors. Therefore, the debtor must still repay those debts after bankruptcy.
For example, you can't discharge debts related to recent taxes, alimony, child support, and court orders. You may also not be allowed to keep certain assets, credit cards, or bank accounts, nor can you borrow money without court approval.
Are reverse mortgages a sham? ›
Not all reverse mortgages are scams, but some can be. To help you spot a scam and steer clear of reverse mortgage fraud, it's helpful to understand how these loan products work and know what red flags to watch out for.
Does the bank own your house after a reverse mortgage? ›
No. When you take out a reverse mortgage loan, the title to your home remains with you. This webpage has information about HECMs, which are the most common type of reverse mortgage.
Can a bank take your home with a reverse mortgage? ›
+ Can a reverse mortgage lender take my home away if I outlive the loan? No, they cannot. And the loan is not due at that time either.
Are mortgages forgiven in bankruptcies? ›
A Chapter 7 bankruptcy wipes out your financial debt, including your mortgage, but you could lose your house. A Chapter 13 bankruptcy is more of a reorganization, and you can even catch up on payments as long as these are included in your plan.
Can I get a loan right after bankruptcies? ›
It may take 1 to 2 years after bankruptcy to qualify for a personal loan. The longer it's been since your bankruptcy, the better. There are some bad-credit personal loan lenders that may work with you. Expect high rates and fees.
What protects lenders from losses when a borrower defaults? ›
PMI protects the lender from the risk of loss if you default on your mortgage, and the premiums are typically paid monthly by the borrower.
How long until you can get a loan after bankruptcies? ›
You'll have to wait at least until all your debts have been repaid according to your Chapter 13 schedule, which will be either three or five years. However, bankruptcy can stay on your credit report for up to 10 years, which may make it difficult to get a loan with favorable terms.
