What happens if I owe money to a bank or store that fails?
Jan 17th, 2009 | By Rob | Category: credit card debt, debt
A reader of Credit Card Debt Law was recently wondering what would happen to their credit card debt if the bank that issued their credit card (and to whom they owed the debt) failed. This topic has also come to my attention because many are wondering what will happen to the money that they owe to Circuit City, now that it has announced that it is liquidating its merchandise and closing its stores in the United States.
First off, I want to stress that, after the bankruptcy of Lehman Brothers, the government seems committed to the orderly transition of unsuccessful financial institutions. That means that I believe it unlikely that any of the large credit card companies fail and declare bankruptcy. Most likely, the federal government would step in and offer additional bailout funds or arrange a merger / buyout by another financial insitution to prevent the type of shocks to the financial system that happened when Lehman Brothers entered bankruptcy.
Of course, if the credit crisis has taught us anything, it is that there is no telling what the future will hold. Anything is possible, and so I’ll go about answering the question.
Unfortunately, you will not receive a windfall because of the failure or bankruptcy of a bank or retail store to whom you owe money. Whether it is debt from a store issued credit card, a bank issued credit card, your mortgage, or your student loans, you will still have to pay the money that you owe. It is a matter of contract and bankruptcy law, and creditors have spent plenty of money on lawyers to ensure that you have to pay your debts.
Your debt to the bank issuing your credit card is an asset that can be bought or sold. In bankruptcy court when a company is liquidated, the judge oversees the sale of assets and payment of the proceeds to the company’s creditors. Your credit card may be purchased by another bank offering credit cards, in which case they will likely send you a change in terms and conditions statement for the continued use of your credit card. Even if you opt out of the changes, you’ll still have to pay the money owed under the original terms and conditions. If your debt is not purchased by a bank issuing credit cards, a company at the very least will purchase the right to collect the payments on your debt, like some debt collectors do, and you will owe them the money as if they were your original credit card issuer.
Although I haven’t examined my credit card statements closely enough for this issue, I presume that your credit cards, as well as your mortgage and your insurance policy, will contain an ISAOA clause (its successors and/or assigns), or its equivalent. The clause allows the company to assign the right to collect your credit card payments to another entity. Although there are rules governing when a contract can be assigned, I’m confident that you will either owe your debt or have one heck of a court battle in front of you.
As for Circuit City credit cards, they have been issued and financed by J.P. Morgan Chase (which bought Bank One) since 2004. Although it has been called a Circuit City credit card, it will continue to be backed and administered by JP Morgan Chase. They’ll continue to collect your payments until your debt is paid off. They may even allow you to continue to use your credit card at other stores, though they’ll likely eventually send you a new, non-Circuit City credit card with some changes to the terms and conditions.
I’m sorry to be the bearer of the bad news -if you believe that I am wrong, please let me know!
Update: A couple recent news articles have said that Circuit City stores have stopped accepting Circuit City credit cards.
I always wondered what happened to my debt if the bank failed. I figured I’d sill have to pay it back, but I can always dream, right? LOL!