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, you still need to pay your mortgage obligations. When a mortgage lender goes under, all of its existing mortgages will usually be sold to other lenders. In most cases, the terms of your mortgage agreement will not change.
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 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 to your business loan if your business fails? ›
What happens to a small-business loan if my business fails? If your business fails, you're still responsible for repaying your loan. As in the case of default, if you can't repay, your lender may seize your collateral and/or personal assets to recover its losses.
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.
What happens when a loan fails? ›
A loan default can drastically reduce your credit score, impact your future eligibility for credit and even lead to the lender seizing your personal property. If you struggle to make regular payments, contact your loan servicer to discuss options, such as creating a manageable payment plan.
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 will not be lost. It is usually transferred to another bank with FDIC insurance, or you'll receive a check. Savings accounts, checking accounts, money market accounts, and CDs are examples of federally insured bank accounts.
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.
What happens if a business can't pay back a loan? ›
When you default on a secured loan, the lender has the legal right to seize your collateral. For example, if you used your business equipment as loan collateral, your lender could take ownership of your business equipment and sell it to get back the money you owe.
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 when a lender goes out of business? ›
If your mortgage company goes bankrupt, you'll still have to make your mortgage payments, but all terms should stay the same. If your loan is active or has just closed, it'll be sold off to another company. If you're in the midst of closing a loan, any escrow funds should be safe, but you'll have to find a new lender.
What happens to a loan when a business closes? ›
If you close or sell your business without repaying your outstanding loan balance, your loan will be considered in default under your loan agreement.
What happens if my LLC defaults on a loan? ›
If the corporation or LLC cannot pay its debts, creditors can normally only go after the assets owned by the company and not the personal assets of the owners. However, the business owner can also be held responsible for corporate or LLC debts in certain situations.
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.
