I have personal finance on my mind these days, and a list of questions I want answers to. So I figured why not use my blog to start answering some of these finance questions rattling around in my brain. The first one I am going to tackle is what happens when your bank or credit union goes belly up. I always wondered how the heck that worked and how FDIC insurance works. I hope this article answers your questions as well.
While the risk of your bank or credit union failing is quite slim, it does indeed happen from time to time. Fortunately, the vast majority of banks and credit unions are backed by a government agency and provide protection to you up to $250,000 per institution. While your money may be safe, it is important to understand exactly what happens to your account activities when a bank fails so you can transition smoothly to a new financial institution.
What happens to your money?
According to the FDIC.gov website, the most common and desirable outcome is for the Federal Deposit Insurance Corporation (FDIC) to quickly step in and facilitate a sale to a healthy bank as soon as possible. This is typically done before the failed bank closes causing very little disruption in banking services to existing customers. Bank customers of the failed bank would then have immediate access to insured funds at the new bank and can continue to make withdrawals, write checks, and use their credit/ATM cards as normal. Customers of the failed bank should continue to use their existing branch until they receive official notice from their new bank.
If the FDIC is unable to find a suitable buyer, they simply pay bank customers directly by check, up to the insured limit of $250,000. According to the FDIC website, this process typically begins “within a few days after the bank closing.”
What if you have more than $250,000 at a bank?
If, for example, you have $285,000 at a bank that fails, you would receive $250,000 in insured funds, and a $35,000 Receiver’s Certificate. This certificate would entitle you to be paid $35,000 when the assets of the bank are liquidated. To avoid dealing with liquidation, it is best to not exceed the insured limit of $250,000 at any FDIC insured bank.
What happens to automatic deposits?
Once the failed bank has been acquired by a healthy bank, all automatic deposits are re-routed to your new account at the acquiring bank. There should be no interruption in the automatic deposit of your paycheck or Social Security check, as an example, and nothing you need to do on your end to facilitate this transition.
If there is no immediate acquiring bank, the FDIC will simply find a local bank to temporarily handle all direct deposits and make funds available to customers causing no disruption in services.
What about checks and auto payments?
Typically, when a healthy bank takes over the accounts of a FDIC insured bank, offices seamlessly reopen the next business day and there is no delay in the processing of checks or auto payments.
If you are in a situation where there is no acquiring bank, and are being paid directly by the FDIC, then the responsibility falls on you to make other funds available to cover outstanding checks and automatic payments. According to the FDIC, it will take “a few days” to get a payoff check to you. Therefore it should be a top priority to make other arrangements for banking activities during that time period as not doing so could result in late fees and penalties.
Do the same rules apply for credit unions?
For the most part, yes. A failed credit union that is insured by the National Credit Union Share Insurance Fund (NCUSIF), provides the same $250,000 protection as the FDIC for its members. Once a credit union fails, the National Credit Union Administration (NCUA) steps in to find a buyer. The NCUA will run the failed credit union until a buyer is found. All banking activities will run as normal.
How to protect yourself from bank failures
Unfortunately, the FDIC or NCUA does not announce ahead of time when a bank or credit union is struggling or headed for a takeover. The single best way to protect yourself is to always bank at a federally insured financial institution and abide by the $250,000 limit per institution.
Ask the Reader: Have you ever been a customer at a bank or credit union that went under? If so, how’d it work out?
By Kyle James