Key takeaways

  • If a bank goes bankrupt, your loans will not be affected and your funds will be protected by the FDIC.
  • If a lender collapses, your loan may be transferred to another institution, but you are still responsible for making payments.
  • To protect yourself, make sure your contact information is up to date, keep copies of your statements, and continue making payments as usual.
  • If your credit score decreases after your loan is transferred, contact the new lender to avoid potential issues.

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 there are some precautions you should take to protect yourself just in case.

If a bank collapses, what happens to its loans?

The first thing you need to know is that if you have a loan, it won’t be affected by the lender going bankrupt. Your repayment term, interest rate and outstanding balance should all remain the same.

Most importantly, says Karen Bennet, senior consumer banking reporter for Bankrate, your funds will be protected.

When a federally insured bank fails, the Federal Deposit Insurance Corp. (FDIC) takes over the bank. It’ll then either sell or dissolve the bank — but your funds are protected, as long as you’re within the set balance guidelines. When a bank fails, the FDIC guarantees your insured deposits will be returned within two business days. — Karen Bennet, senior consumer banking reporter for Bankrate

Here’s what happens when a lender fails, whether it’s a bank or another financial institution.

1. Its assets are sold

Its assets are sold to pay off creditors. Loans and other accounts are considered part of those assets. That means your account will most likely be sold to another institution, which will then take over and manage it 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. If you have more than one type of loan with the lender, they 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 written notice with the transaction’s details.

Once the transfer is completed, typically a month before payments begin, you’ll get another letter from your new lender. It will have all your new account details, including your new payment due date and where to send your payments.

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.

You still owe the money even if a bank fails

While the failure of your lending institution does shift where your payments will be sent, it doesn’t change the importance of paying off your loan. It is not a valid excuse for missing loan payments. Doing so can result in personal loan default.

What to do if your lender goes under

Lenders may sell your loans and other accounts to other institutions at any time, even if they do not go 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 receive all important communications regarding your loan account and 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 drop in your credit score despite making payments as usual, that’s a sign that the lender may not have received the payment. 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. Your loan’s terms and personal loan rates should remain unchanged, even if a different institution is handling the account. Just keep making payments as usual and be on the lookout for any communications that may come your way to avoid unpleasant surprises.