What to Expect If Your Bank Fails

Have you ever considered what happens to your money if your bank fails?

Before the financial crisis, the idea of a bank ceasing to exist was probably the furthest thing from your mind. But it’s happened to me before. I used to bank with Wachovia and when it fell my accounts were seamlessly transformed to Wells Fargo.

But what exactly happens during the transfer? And do you get access to all of your money right away? Read on to find out.

What should you do?

Most banks and credit unions are insured by the Federal Deposit Insurance Corporation (FDIC) or National Credit Union Administration (NCUA).

It’s their job to insure the deposits made at U.S. institutions in case of failure in order to protect people like you and me. When an insured institution closes they cover depositor balances up to $250,000.

If your bank fails, the FDIC communicates the closure in a letter mailed to the address you have on file. And in most instances, you won’t have to do anything to obtain your money or transfer it to a new financial institution. Your insured cash will either be wired to a new bank that takes over ownership or the funds will be sent to you in a check.

How to access your money after bank closure

According to the FDIC, when a bank closes they attempt to organize a quick sale to another institution. As soon as the sale is made you become a customer of the new bank and you can access your funds right away.

The new bank will accept your checks, debit and credit cards for a certain period of time. Eventually you’ll receive information on the issuance of new checks and cards from the new bank and your old ones will no longer work.

If another institution doesn’t acquire your bank the insured balance will be paid directly to you in a check also known as a payout. The FDIC states that federal regulations require a check to be cut as soon as possible and their goal is to send funds within two business days.

However, receipt of your funds may take longer if you’re asked to submit additional documentation to prove the account is insured or that you’re entitled to the money.

Direct deposits after a bank closure

If another financial institution takes over your bank, the direct deposits you have set up will be re-routed to the new one. Receiving direct deposits is somewhat more complicated if your bank closes without a new owner and you’re scheduled to receive a payout.

The FDIC states that they will attempt to send government annuity deposits like Social Security to another bank near you, but otherwise you’ll have to do some research to determine where your funds are being held. To find out how your bank will handle direct deposits they suggest you reach out to the closing branch’s local office.

What happens to payments in limbo?

Again, if your bank is acquired by another one you won’t have to do much to manage your pending payments. Payments in transit will deduct from the new account automatically.

Dealing with pending transactions is a little more difficult if you’re in a payout situation. After your bank closes, the account will freeze and payments you’ve initiated will not go through. They will be returned as unpaid noting that your bank has closed.

A check returned because of a bank closure won’t affect your credit score, however you must provide the money to cover your debts in another way, according to the FDIC. You may  be able to avoid fees and penalties from creditors by sending proof that your bank failed and by following up with their customer service department to state your case.

Although a bank closure can sound scary, rest assured there are procedures in place handled by government agencies to make the transition as painless as possible.

One precautionary measure you can take before an institution closure is finding out whether you’re money is insured by the FDIC or NCUA.