So Your Bank Failed, Now What?

by Xin Lu on 14 July 2008 12 comments

Last week I wrote that ailing banks usually give the highest interest rates and mentioned the troubles of IndyMac. Last Friday, the FDIC has officially named IndyMac a failed bank and took control of its assets. With more than $30 billion in assets, the IndyMac Bank failure is the largest bank failure since the 1980s. So what is a customer supposed to do in such a situation?

If you have deposits under $100,000 at an FDIC insured bank and the bank fails, then you generally do not have to worry that much. In the case of IndyMac, customers were able to successfully withdraw and transfer their insured deposits today.

When you have uninsured deposits at a failed bank like  this retired teacher who deposited $360,000 into IndyMac because he was attracted by the high interest rates, then the claim process may be a little bit more hairy. In the case of the IndyMac situation the FDIC is allowing a 50% advance on uninsured deposits. This means that you can withdraw 50% of the deposits beyond the $100,000 FDIC limit. The rest of the money will be paid to depositors after the FDIC liquidates a failed bank. Generally the FDIC takes its share in administration fees first, and then pays the bank's creditors, and the depositors. It is very much like dealing with a bankruptcy. The FDIC has a very detailed FAQ here about what you should do now if you have uninsured funds at IndyMac bank.

If you have a mortgage at a failed bank, you are not off the hook for your debt, but your loan terms should not change. In most cases you would receive a polite letter from the new owner or mortgage servicer informing you where to send your payments. By law, a new mortgage servicer must inform you of updated information within 15 days of a servicer change. The notice should include the address and name of the new servicer, the date the new service will begin to accept your new payments, and most importantly have a statement that says the terms of your loan are not changed. You also have a 60 day grace period after a transfer to a new servicer so the new servicer cannot charge you a late fee for sending a payment to the old company by mistake. If you do not get any notice about your loan, then you should try to find out where it is held. Also, keep records of every payment you made and keep on making payments. Even if your payments are returned as undeliverable at least you have proof that you made a good faith effort to pay for it. In the case of IndyMac, the FDIC should be sending notices to every mortgage holder soon.

Finally, here is some more information about the IndyMac Bank failure from the FDIC. The FDIC has set up a call center for consumers seeking information. There has been a total of five bank failures this year and the FDIC expects more bank failures in the next 18 months . The best thing to do is to make sure that your bank accounts are insured and be vigilant to any news about where your money is held.

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Guest's picture
Aldohas

good article.
I hope my bank doesn't fail either

Guest's picture
K. P.

That sucks, I remember a while back another big bank had also failed. Can't put my finger on the name though...

Guest's picture
Guest

If you have more than $100K in any single institution, then you should take steps now to break it up into $100K at different institutions. It does not count, for example, to try to open up multiple accounts with different names on it (the fellow with the $360K had several names on his deposits). Worth taking the time to do this now, given this current climate.

Guest's picture
AndyS

Some good points to note here that most folks (including myself had forgottern about). With recent bank failures it is definetly worth reviewing if you are covered. I recently wrote about choosing between ING and HSBC direct savings acccounts, and as a final critera added in the FDIC insurance step. The key to remember is that since it's a person's aggregate deposits, and not their individual accounts, that are insured, any amounts over $100,000 deposited at any one bank are not covered. So even if you have 2 seperate accounts in the same bank with each totalling less than $100K, but in aggegrate more than that you could still be overly exposed to losses if your bank fails.

 

The best bet is to pick a reputable bank (albiet at a slightly lower APY) that has the least chance to going insolvent. Have mutiple accounts and even better choose ING or HSBC because they are foreign owned and hence are not as exposed as US based banks with their dwindling capital.

Myscha Theriault's picture

We are in the process of opening up a second online savings account as well. Since we have to liquidate our waterfront property, we want to be prepared in advance and not get caught even temporarily with more than the insured limit at one place. Of course, we'll rapidly be buying a new house due to flood recovery, so it won't exactly be sitting there very long. But we feel better knowing we've addressed the issue in advance.

Guest's picture
Jerry

It is depressing to see how most of these problems are taking a severe turn. I feel sorry for the teacher that invested $360,000 dollars in the IndyMac. It is just unfortunate. Is this really the second largest bank bailout in US history?

Guest's picture
Sam

Morale of the story? Don't put more than 100k into any banks but rather invest them in more secured financial institutions..treasury bills, mutual funds ...this will help.

Cheers!

Xin Lu's picture
Xin Lu

Jerry, this isn't really a bank bailout.  This is a bank seizure.  Basically FDIC closed it down and took all of its assets and are planning to sell it to some other more stable bank.  Still, it is costing the FDIC money to do all of this and pay whatever insured deposits the bank can't pay. 

Guest's picture
Kelja

FDIC insures deposits of up to 100K combined for any single bank.

How come in the IndyMac case, reports are coming out the FDIC is saying it will cover more?

????

Xin Lu's picture
Xin Lu

Kelja, the FDIC has always had a process for claiming uninsured funds. Basically they liquidate the bank, pay themselves, and whatever is left goes to depositors and creditors. Later on they will probably post a chart telling people what percentage of the proceeds from the sale of IndyMac goes to which people. In the case of IndyMac they are offering a 50% advance on these uninsured funds for depositors so people can withdraw 50% of their uninsured funds.

See this link for the priority of payments after the FDIC disposes of the bank: http://www.fdic.gov/bank/individual/failed/IndyMac.html#Priority

Guest's picture
Guest

Primarily for institutions, but cdars splits your deposit up among other banks to cover up to $50 million under FDIC insurance:

http://www.cdars.com/why-cdars.php

Guest's picture

It is crazy that this happens. You never think it will happen to you when you invest your money in the bank. I will be more careful when looking at banks from now on