What Happens When A Loan Provider Goes Bankrupt?

What Happens When A Loan Provider Goes Bankrupt?

Written by Lisa Rennie
Fact-checked by Caitlin Wood
Last Updated June 21, 2022

While banks and credit unions continue to provide loans of all types, online lenders are growing in popularity. But while online lending may offer plenty of conveniences, these lenders may not be as stable as a traditional financial institution. Simply put, online lenders could face closure due to bankruptcy or legal reasons far more easily than the big banks in Canada

If you have a loan with one of these lenders and you suddenly find out that your lender has gone bankrupt, do you know what you should do?

Read on to find out what to expect when a lender goes under and what that holds for you.

What Happens When A Loan Provider Goes Bankrupt?

If a loan provider files for bankruptcy, they will cease the funding of new loans. 

When it comes to existing loans, either the lender will continue collecting payments on existing loans until they are all paid off, or another lender or liquidation firm will purchase and assume the lender’s loan portfolio.

If you still have a loan with the bankrupt lender, you’ll be notified of the new lending company that you’ll be making loan payments to. Generally speaking, the terms of your loan shouldn’t change. 

What Happens If Your Lender Was Closed Due To Legal Issues?

Sometimes a lender can shut down because they failed to meet the lending laws and regulations. For example, if the lender was charging more than they were legally allowed to according to provincial regulations, your rate could decrease with the new lending company. In the case of predatory lending, you may be eligible for a refund of any interest rates or fees that were charged under illegal conditions.

Do You Have To Continue Making Payments?

Your lender’s bankruptcy does not mean you can stop making payments towards your loan. Regardless of your lender’s status, you’ll still be required to make payments according to your loan agreement. Your contract still remains in effect even if your lender goes bankrupt. 

Other than receiving notification that your loan repayments are going to another lending firm, you may not notice much change in your loan at all. Things should progress as it normally would even if your lender shuts down. Your debt will simply be transferred to another company without any impact on your payments. 

Can You Stop Making Payments If No One Reaches Out? 

There may be one particular scenario in which you may be able to stop making payments; namely, if nobody notifies you of your debt being transferred to another agency. 

If you don’t hear from anyone regarding the acquiring of your loan after your lender files for bankruptcy, consider writing a letter to your original lender. Inform them that you’d like to repay your loan, but would like some proof showing that the loan has been legally transferred to the appropriate entity. 

If you receive no response from the lender or from a collection agency, you may want to postpone your payments. You want to be sure that your money’s going to the right company and doesn’t wind up in limbo or in the wrong hands. 

At some point, the statute of limitations on your loan may pass, which refers to the time frame when a lender can take legal action against you for repayment. When this happens, debt collectors may no longer be in a legal position to sue and collect. However, before you stop making loan payments, be sure to seek advice on this from a lawyer licensed in your jurisdiction.

Can You Stop Making Payments If Your Lender Goes Bankrupt? 

As mentioned, it wouldn’t be a good idea to stop making your loan payments if your lender shuts down due to bankruptcy. You’re still obligated to continue to adhere to your original loan contract. Only if you’re not notified on whom the new lender is, should you consider possibly pausing your loan payments. However, before you make any major decisions consider consulting with a lawyer first. 

What Happens If I Stop Making Payments? 

It should be noted that if you stop making loan payments, your credit score could be negatively impacted. If a new lender takes over your debt, they will start monitoring repayments. If they notice that your payments have stopped, the credit bureaus will be notified, which can negatively affect your payment history. 

Once your payments are late by a month or two, your loan may be considered in default; which can also impact your credit rating. Even one loan default on your credit report could stay on your record for years, making it more difficult for you to get approved for loans and credit accounts in the future. 

What Should You Do If Your Loan Provider Goes Bankrupt?

If your lender goes bankrupt, there are a few steps you should take:

  • Call your current and new lenders. Get in touch with both lenders to find out what you can expect and what changes may be taking place to better prepare yourself.
  • Verify your repayment terms. As mentioned, your loan payments should not be affected if your lender goes bankrupt. The terms and conditions should still remain the same. The only difference is that your payments will be going to a new lender. However, you’ll still want to go over your loan’s repayment terms to verify that your payments are going to the right place and that they’re made for the right amount every month. 
  • File the necessary paperwork. Some documents could get lost in the cracks, especially if you’re still working with physical copies. If you don’t have your paperwork stored digitally, keep a record of old paper statements as they may be required if something goes wrong.
  • Set up an online account. Having an online account will make it easier for you to make payments and access your account information. 

Watch Out For Secured Loans

The situation described above is generally what happens with unsecured loans, such as personal loans that have no asset of value backing the loan. The situation may differ with secured loans. 

If you currently have a secured loan – such as a mortgage or auto loan – then your lender may have a lien on the asset. If you want to sell your home or car, or refinance the loan then you may have to clear the lien first.  

It’s possible for there to be an issue if the lender who issued a secured loan, goes bankrupt. If the line must be cleared and the lender is gone, there could be a problem when it comes to determining who has the authority to take the funds or clear the lien. In this case, there could be a delay in selling the asset and out-of-pocket expenses to release the lien. 

Lender Bankruptcy FAQs

How do I get in touch with a lender that’s no longer in business?

You should still be able to connect with your lender if they’re still collecting your payments, even if they’ve essentially shut down. Otherwise, get in touch with your new lender if you have questions or concerns. 

Can I get the same benefits with a new lender?

Possibly, though that depends on your new lender and whether or not they offer the same features and perks. 

What will happen to my money if my bank shuts down?

If it’s your bank that has gone under, you are eligible for up to $100,000 of your money to be covered by the Canada Deposit Insurance Corporation (CDIC)

If my lender goes bankrupt, will changes be made to the way my variable rate is calculated?

Variable rate calculations usually won’t change if your lender shuts down and another lender takes over your loan. That said, your rate could be impacted if you switch over to another lender that offers different terms and conditions on your loan. But the lender is responsible for informing you of this rate change upfront, so there are no unpleasant surprises.

Final Thoughts

You might be concerned after learning that your lender has gone bankrupt. After all, they’re holding a lot of your money. Luckily, your lender’s bankruptcy shouldn’t impact you much. 

Your payments will still need to be made as they always have without change to the terms, conditions, and rates. That said, you should still find out exactly what is happening behind the scenes. Including who your new lender is and whether or not there could be subtle changes to your loan.

Rating of 5/5 based on 1 vote.

Lisa has been working as a writer for more than a decade, creating unique content that helps to educate Canadian consumers in the realms of real estate, mortgages, investing and financial health. For years, she held her real estate license in Toronto, Ontario before giving it up to pursue writing within this realm and related niches. Lisa is very serious about smart money management and helping others do the same. She's used a variety of financial tools over the years and is currently growing her money with Wealthsimple, while stashing some capital in a liquid high-interest savings account so that she always has a financial cushion to fall back on. She's also been avidly using her Aeroplan TD credit card to collect as many Aeroplan points as possible to put towards her travels!

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