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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.