Could Your Business Fail If Your Bank Fails?

Kate Lister — Fri, 17 Dec 2010 23:11:51 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/could-your-business-fail-...

That bad news: So far in 2010, 149 banks have failed, more than the 140 that went out of business in 2009. In fact, more banks have failed this year than in any year since the S&L crisis of the '80s and '90s when a total of 747 failed.

The good news: The banks that are failing this year represent only about half the assets of those than failed in 2009, and a third of the assets of those that failed in 2008.

What If the Bank That Fails Is Your Bank?

The Federal Deposit Insurance Corporation (FDIC) insures bank deposits (principal and interest) in member banks. According to their website, "FDIC insurance is backed by the full faith and credit of the United States government. Since the FDIC's creation in 1933, no depositor has ever lost even one penny of FDIC-insured funds."

Keep in mind that your money is insured only if it's in an institution that's actually a member of the FDIC. It's not hard to find a bank online that offers attractive interest rates (anything over 1% these days) and claims to be FDIC insured, but it's not. It's not a bank, and it's not insured.

If you're not sure if your bank is insured, visit the FDIC Bank Find website and check.

And to be clear, the FDIC doesn't insure all your money. FDIC insurance covers checking, NOW, savings accounts, money market deposit accounts, and certificates of deposit (CDs) up to the insurance limit. Even if you purchase from an insured bank or savings association, the FDIC doesn't insure your investments in "stocks, bonds, mutual funds, life insurance policies, annuities, or municipal securities," according to their site.

How Much Personal Money Is Protected?

The FDIC will insure up to $250,000 per depositor per ownership category, meaning single owner, joint, trust, and retirement accounts.

A single account is insured for $250,000, and a joint account with your spouse, since there are two depositors, would be insured for $500,000. If you were brave enough to add two kids to the joint account it would be covered up to $1 million because the account has four depositors.

If you also have a revocable trust account, that's covered up to $250,000, and certain retirement accounts — such as IRAs and Keogh accounts — would be covered up to another $250,000 too.

So, in this example, you'd be covered up to $1,250,000 if your bank failed ($1,750,000 if you included the kids).

How Much Business Money Is Protected?

Let's say you run an online business with a shopping cart that accepts credit cards, and you've set up a bank account where your merchant processor deposits customer payments. And let's say you also have a personal checking account set up in your name only.

If your business is a sole proprietorship (it's not incorporated or a partnership), that account is insured as if it was part of your single account — the two accounts together are insured for $250,000.

If your business is a corporation or partnership, the funds they deposit are insured up to a maximum of $250,000. Unlike a sole proprietorship, however, they are insured separately from your personal accounts or any stockholders or partners.

But keep in mind that even if you have separate accounts designated for different purposes, they are not separately insured — they're added together and insured up to $250,000.

What If I Want To Deposit More Than $250,000?

The simple solution, if you want to make sure your deposits are insured for more than $250,000, is to put the money in different institutions. Note that making deposits to different branches of the same institution doesn't increase your protection.

What Could Possibly Go Wrong?

The fact is, banks still fail. The FDIC doesn't send a warning that your bank is going under, and only stupid senators (very publicly) release letters to regulators urging that they take action to prevent a bank's collapse (IndyMac in this unusual case). The way you find out is when your debit card is denied or you discover your bank has a new name.

If that happens, you might wonder what's the FDIC insurance claims process? Do you get paid right away? Do you have to wait, and for how long? How do you prove how much you had in your account? What will happen?

The FDIC is accurate in claiming that no one has lost a penny of insured funds. In fact, when the worst has happened, they've been known to step in and return a portion of uninsured funds.

But what typically happens if you have more than $250,000 in an account and your bank fails? You become a creditor, just another person in line to get whatever money the FDIC can recover by selling the bank's remaining assets such as desks and file cabinets.

How Long Will My Money Be Tied Up?

Within a few days, you'll be doing business with a new bank and your insured funds will be available.

When the FDIC determines a bank needs to be shut down, they obtain bids from other banks and the failed bank becomes part of another entity. New bank personnel and FDIC people will move into your old bank's offices. They typically use a weekend to re-organize the books and re-open the failed bank as a branch of the new bank by Monday morning. Presto-chango, all customers of the failed bank became customers of the succeeding bank.

If you have balances over the FDIC limit, you become a creditor of the failed bank. The FDIC will sell off the failed bank’s assets and, if they have the money, pay you from the proceeds. That process can take years.

Could Your Business Fail If Your Bank Fails?

If you have deposits well in excess of the FDIC limit, and your bank can't be sold to another institution, you could lose enough to go under with the bank. But if you pay attention to where you put your money, you will be protected.

This article is from Kate Lister of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

So Your Bank Failed, Now What?

Xin Lu — Mon, 14 Jul 2008 20:36:14 +0000

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.

This article is from Xin Lu of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: