How To Protect Your Assets When Your Bank Fails

Think times are tough today?

When Franklin D. Roosevelt was inaugurated president during the Great Depression in 1933, about 30 percent of Americans were unemployed. Thousands of banks had gone bankrupt, adding to the climate of fear in America. FDR wanted something better for Americans and he famously proclaimed in his inaugural address, "The only thing we have to fear is fear itself."

In June 1933, Congress created the Federal Deposit Insurance Corporation (FDIC), which insured customer deposits up to $5,000. Today, that FDIC limit stands at $250,000.

If your bank has gone under, don’t despair. Today, Americans can still rely on the FDIC and other consumer safeguards for protection.

The FDIC coverage limit is $250,000. That’s for each depositor, for each insured bank. For the average retail bank customer, this mean the total sum of a single account is completely covered up to $250,000 at each bank. In this case, a single account is defined as checking, savings and CD deposits. Other categories of accounts, like trusts, joint accounts and retirement accounts each benefit from their own distinct $250,000 limits at each bank.

Once a bank is insolvent (meaning it has more debts than assets) it can be seized by the FDIC. The FDIC either auctions the bank's assets and liabilities to another bank, in effect selling the failed bank to a healthy one, or it completely liquidates the failed institution, selling off the assets piecemeal and then paying depositors from the proceeds. Any shortfall comes from the FDIC’s own financial reserves, which in turn come from premiums the agency charges banks in return for the insurance.

If your bank goes belly-up, the FDIC will provide you with formal notice that your bank is shutting its doors and your deposit accounts will be, for all intents and purposes, closed. You’ll get a check from the FDIC for your insured money, though it may take a week or so.

Once your bank is kaput, its ATMs will stop working and your check, debit and credit cards with the bank will be useless. Any checks that haven't cleared will be returned to you, stamped with the words "Bank Closed." You’ll probably receive sufficient notice from the FDIC to prevent you from bouncing checks, but if you don't heed the FDIC’s notice in time, you could face bounced check fees from merchants and late fees from those who have billed you.

Know that your loans, mortgages and credit accounts will definitely find a buyer. In the world of banking, debts are regarded as valuable assets and they don’t vanish just because the originating bank has. Don’t make a common mistake, which is to blow off your debts and regular payments, just because your bank has closed. Rest assured, other people are keeping a close eye on what you owe, so stay on top of your payments. The new owners of your debt will soon contact you with details.

Also keep close watch of all mail. Once your deposits and loans are transferred to new owners, you’re bound to get many explanatory letters and brochures from your new bankers. Examine and understand it all; ignoring the fine print could cost you plenty. Here’s what to look for:

Installment loans, such as mortgages: Your mortgage loan lives on, with its existing balances and original terms intact, but with the new controlling bank now servicing it. Under federal regulations, the new owners have 15 days to notify you. The bank ownership change won’t affect your interest rate and terms of payment, but it’s a safe bet that the name of the payee and the payee’s address will change. Whether you send paper checks via snail mail, or use online banking, make sure that you send the payments to the right destination, made out to the right entity.

You don’t want your payment ending up in limbo, because if it does, it could incur late payment fees or hurt your credit score, regardless of your good intentions to pay on time. That said, there is by federal law a 60-day grace period after the transfer of bank ownership during which you can’t be charged a late fee by the bank if you mistakenly send a mortgage payment to a wrong address or online destination.

Checking and savings accounts: Interest rates, fees and terms can all change. Scrutinize minimum required balances -- maybe your old bank didn’t require them or they were low, and now your new bank isn’t so generous. Don’t take anything for granted. If you don’t like what you see, then shop around for a new bank.

Revolving credit, such as credit cards: Unlike your installment loans, the terms of which are nailed down, your new bank can change just about all aspects concerning your credit cards and lines of credit -- the whole gamut can be dramatically transformed, including interest rate, credit limit, due date, fees, and grace period. Again, if you don’t like what’s happening to your credit card -- say, the interest rate has suddenly been hiked from 8.5 percent to 19 percent -- then dump it and shop around for a better one.

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