Crashing Financial MarketsIn writing recent articles about the takeovers, bailouts, and mergers, some astute readers at BlogHer posed the question “What happens to my credit card debt if my bank fails?”. You might think the question sounds far fetched, yet in this climate just about anything is possible.

So what happens? Do you have to owe the balance all at once (like a 401K loan when you leave your company)? Is the debt forgiven (ha!)? Does another bank just assume the debt? Or something in between and hopelessly complicated?

I was turned onto an article at USA Today by miteegirl called “What happens to credit card debt if a bank fails?”. In the article it shares:

“The watchword for cardholders should be this: Watch your mail,” advises Robert Hammer, a Thousand Oaks, Calif., investment banker who specializes in the buying and selling of credit card portfolios. “That’s where you’ll be notified of any changes.”

High-profile bank belly flops such as the recent IndyMac Bank collapse, which with an estimated $32 billion in assets ranks as the third largest bank failure in U.S. history, naturally sends customers scrambling to claim their cash. And the Sept. 15 failure of Lehman Brothers, whose $613 billion in debt made it the largest bankruptcy in American history, is liable to make consumers nervous about their own financial institutions.

But there’s good news for IndyMac Visa cardholders: because IndyMac was not a card issuer (issuing bank) but merely an agent bank (marketing agent of the issuer), in this case of Elan Financial Services, its cardholders may never feel any effect from the closure.

“It’s typically a non-event,” says Hammer. “The cards continue to be usable and, especially if the bank was an agent of somebody else, there will be zero change in card terms.”

So in some ways it may just be a total non-event. That is somewhat comforting.

The exception to that rule, however

are lines of credit. Home equity lines of credit (HELOC) follow a different set of rules as Nina learned when Citibank froze their HELOC and reduced it from $168,000 to $10,000. A good reminder that lines of credit can be zapped in an instant.

Student loans are falling apart at the seams as well. CNN reports in “Student cashes in savings after private loan falls through”:

Eric Hahn thought his financial situation was set after he was approved for a private student loan with an 8 percent interest rate to supplement his federal education loans.
Eric Hahn, 21, estimates he will be in debt for the next five to seven years for his undergraduate tuition.

Eric Hahn, 21, estimates he will be in debt for the next five to seven years for his undergraduate tuition.

Just a few weeks later, Hahn, 21, was forced to cash in his savings and investments so he could make his rent and tuition after finding out that the lender, MyRichUncle.com, had suspended its private student loan program.

“Due to continued disruptions in the capital markets, combined with the continued demand we have experienced this year, we are reaching funding capacity limits,” a message on his cell phone said, mimicking a statement on the company’s Web site.

Eric is not alone:

About 8 percent of student borrowers rely on private loans, which tend to be costlier and stricter than federal loans, said Robert Shierman, executive director of the Institute for College Access and Success. In doing so, Hahn and others like him are getting a crash course in market volatility and its effects on the consumer’s ability to find money.

The bottom line? It is one volatile ride right now and the only real security lies in taking sound and prudent financial steps. I do wholeheartedly believe though that where there is a will, there is a way…just make sure any creative financing you do is grounded in solid fundamentals.