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Home»Students»What happens to my student loan if my bank or lender goes bankrupt?
Students

What happens to my student loan if my bank or lender goes bankrupt?

March 17, 2023No Comments4 Mins Read
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After the fall of Silicon Valley Bank and other banks such as student loan refinance lender First Republic showing signs of struggle, some borrowers are hoping their bank’s misfortune could mean some student debt will be erased.

Unfortunately, a bank that fails or declares bankruptcy is generally not good news for borrowers. Although there have been reported cases of borrowers emerging from a bank’s collapse, in most cases they end up going downhill.

In fact, the double standard of bankruptcy is another example of how the game is stacked against student borrowers.

Bank failures and your student loans

Many borrowers hope that a failing bank or lender will mean they won’t have to repay their student loans.

This is a reasonable theory on the face of it. If the bank no longer exists, who cashes the monthly check?

The problem for borrowers is that the debt is transferable. Money owed to a lender is an asset that financial institutions can buy and sell. If you have borrowed money from bank A and bank A desperately needs the money, they could sell your loan to bank B. At this point, you will need to make payments to bank B.

The terms of the original loan agreement are almost always written so that the debt is transferable.

Trouble for lenders usually means trouble for borrowers

Switching student loans from one lender to another is not just a minor inconvenience. For many borrowers, this results in significant hardship.

When a loan holder changes, borrowers must adjust how they make their monthly payments. For borrowers using automated bill payment, transitioning to a new lender can lead to problems and possibly missed payments.

In other words, change is not just a headache. Forced transfer to a new lender can result in late fees and unfavorable credit reports.

Worse still, the company buying the debt may be particularly hostile to borrowers.

Lenders who sell directly to consumers have an incentive to have a good reputation. If the market knows a lender is terrible, students will avoid that particular lender. Thus, some lenders have given borrowers slack. This assistance may mean an additional deferral not required by the loan agreement or forgiveness of debt in the event of the death of the borrower.

If the new lender does not market directly to consumers, there is less incentive to help struggling borrowers.

Cases where a borrower takes advantage of the bankruptcy of a lender

I hesitate to include this information because it rarely happens and I don’t want anyone to hope.

That said, it is a remote possibility that exists.

In rare cases, lenders do a terrible job of keeping track of their records. If the bank or lender quickly goes bankrupt and liquidates all its assets, some loans could be overlooked.

I’ve heard anecdotal stories of borrowers who had loans from a lender who collapsed and then never received a bill.

Keeping digital records makes the chances of an accident occurring particularly low.

Sherpa Tip: If you think your debt records might be permanently lost, it’s a good idea to speak to an attorney in your state with experience in collections.

The lawyer can advise you on protecting your rights and let you know when you are legally clear.

The double standard of bankruptcy

Bankruptcy is an integral part of our financial system. It allows investors and consumers to get a fresh start after a major monetary setback.

If a lender fails and declares bankruptcy, investors don’t get stuck with the lender’s debts. Their business has failed and they can try again.

Borrowers do not have the same second chance. If they go to college and it doesn’t work out, they don’t have an easy path to a fresh start. They carry a debt that could last for decades and fundamentally alter the trajectory of their lives.

We have seen this double standard play out when lender My Rich Uncle declared bankruptcy.

While there are a few new hope for bankrupt student borrowersborrowers have a long way to go before they are treated like business owners, home buyers or credit card users in bankruptcy courts.

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