What Happens to Your Money if Your Bank Fails?

Bank sign on glass wall of business center.
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With the aftermath of the third largest bank failure in U.S. history upon us following the collapse of Silicon Valley Bank late last week, concerns about what happens to customers’ money when a bank has to close down are abundant.

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According to the Federal Deposit Insurance Corporation (FDIC), there have been 561 total bank failures from 2001 through 2022. The good news is, prior to 2023’s surge in bank failures, the majority took place during the Great Recession and its aftermath from 2008 through 2011. Zero bank failures occurred in 2021 and 2022.

However, just because most people’s banks don’t fail doesn’t mean it can’t or won’t happen to you. So what happens to your money in that case? And what can you do to avoid the risks of bank failure? Here’s what the experts have to say.

What Happens When a Bank Fails

The vast majority of banks are insured by the FDIC, although some choose smaller deposit insurers. If an FDIC-insured bank fails, the government-backed agency protects consumers’ money by selling the bank to another financial institution or paying depositors directly up to $250,000.

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If your bank is sold, your money is typically available in your new account within two business days and your terms and conditions stay the same, said Levon Galstyan, CPA at Oak View Law Group.

“However, it may take longer if a large number of depositors are affected by the bank’s failure,” he added.

Direct Deposits, Pending Transactions and Bills After a Bank Failure

What if you have direct deposits set up through your current employer? If your bank is acquired, you shouldn’t need to take any action. Your deposits should be redirected automatically to your account at your new bank.

However, if there’s a delay and your accounts aren’t immediately transferred to another bank, you might need to reach out to your employer and have them temporarily redirect your paycheck to another account.

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“In any case, it’s a good idea to keep track of your direct deposit information and to update it as necessary if you change banks or if there are any changes to your bank account information,” said Galstyan. “This can help ensure that your direct deposits continue to be credited to the correct account and that you have access to your funds in a timely manner.”

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Keep in mind that direct deposits and pending transactions differ during a bank failure.

“Transfers and checks in process may be returned unpaid,” said Dennis Shirshikov, a finance, economics, and accounting professor at the City University of New York and head of growth for Awning.com. “You may need to make alternative arrangements to cover any outstanding payments or bills.”

After a bank failure, outstanding checks and payment requests connected to your original account won’t be able to process. But don’t worry — this doesn’t affect your credit, according to the FDIC. Just make sure to pay those bills from your new account as soon as possible.

How To Protect Yourself Against a Bank Failure

Although bank failures aren’t common, they still happen from time to time, whether due to poor management, economic downturns, regulatory issues, fraud, embezzlement or cybersecurity breaches, said Galstyan.

Thankfully, there are several things you can start doing to protect your money from that risk.

Spread your money out across several banks.

If you have more than $250,000 in an FDIC-insured bank that fails, you can receive a claim against the bank’s estate for the extra funds. It’s much safer, though, to spread out your assets across several institutions so you don’t exceed the insured amount, said Shirshikov.

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Choose a well-regulated and financially sound bank.

“Look for a bank that’s insured by the FDIC or another deposit insurance agency, has a strong balance sheet and financial performance, and has a history of responsible management,” said Galstyan.

To guard against errors or fraud, you should also monitor your account activity and statements regularly, he added. Be sure to report to your bank any suspicious or unauthorized transactions you may see.

Stay informed.

Staying up to date on financial news and trends can help you spot warning signs of instability at your bank so you can make the best decisions possible for your accounts.

“Some warning signs of potential financial trouble for a bank may include declining stock prices, negative news reports, management turnover or regulatory enforcement actions,” said Galstyan. “However, it’s important to note that a bank’s financial condition is complex and challenging to understand from the outside fully.”

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About the Author

Jenny Rose Spaudo is content strategist and copywriter specializing in personal and business finance, investing, real estate, and PropTech. Her clients include Edward Jones, Flyhomes, PropStream, and Real Estate Accounting Co. As a journalist, her work has appeared in Business Insider, GOBankingRatesMovieguide®, and various smaller publications. She’s also ghostwritten a book and hundreds of articles for CEOs and thought leaders. Before going freelance, Jenny Rose was the online news director for Charisma Media, where she oversaw three online magazines, hosted a daily news podcast, and managed the editorial content for the company’s robust podcast network. In 2014, she graduated summa cum laude from Stetson University with bachelor’s degrees in Communication & Media Studies and Spanish. During her college career, she won two awards for her research and was named “Top Senior” in both her majors. Find her at jennyrosespaudo.com and connect with her on LinkedIn.
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