What Happens if Your Bank Declares Bankruptcy

Banks declaring bankruptcy seems to be a popular concern at the moment with major financial institutions in the US and UK either failing or being taken over.  Obviously the answer people want to hear depends on whether they are depositors or debtors with the bank in question, with debtors wanting to see the bank and all record of their debt destroyed, and  depositors anxious about getting their money.  In most cases it is going to be debtors that don’t get what they want.

If you have a debt with a bank that fails then your debt will form part of the banks assets that will be sold off.  It is very likely that you will have to continue paying your debt in exactly the same way that you have always done.  There is a small possibility that if you were not on a fixed interest rate that you will have to pay a higher rate to the new owner of your debt.  The only way that you are likely to benefit is if the debt was sold at below its face value.  In this case the new creditor may be willing to accept a settlement figure lower than the face value (since they would still be making money).

If you are a depositor with a bank that fails then you will have to rely on the compensation schemes put in place by individual national governments.  In the UK this applies to all deposits by individuals up to £35,00 (shortly to increase to £50,000).  This is per individual so if you have a joint account the amount covered will be doubled to £70,00/£100,00.  It is also per registered financial institution so it is possible to spread even very large deposits around a number of financial institutions to make sure that they are covered.  Beware of seemingly separate banks that are actually registered under their parent owner (e.g. the Santander Group in the UK) as these will all count as a single financial institution.

In addition to the specific insurance schemes it should be noted that no government wants to see any depositors lose money in the current climate, as it would damage confidence in that country’s financial institutions.  To date no individual has lost money in a major UK or US bank during the current financial crisis.

Tags: bank failure, Bankruptcy, banks, credit crisis, financial crisis