25

I have debt to Capital One. If they fail, and whoever the trustee is fails, will the debt eventually get lost in bankruptcy proceedings?

Considering the Lehman bankruptcy is still ongoing, well past statute of limitations, wouldn't a major corporate bankruptcy de facto destroy large amounts of debt?

  • Some types of debt can be offset against income for tax deduction. This happened to me when a debt I didn't pay was sold then forgotten about. Another thing you can try and do is purchase a now dud receivable (factoring) at a discount and try to negate the debt. – Frank Sep 26 at 5:50
  • 1
    related question: "When Pretty Boy Floyd burned mortgages, were the mortgagors really off the hook?" – Michael Sep 26 at 19:22
  • 3
    Banks do not go bankrupt, they get taken over by the banking regulators, and the regulators will take over the assets (outstanding loans) and guarantee the liabilities (deposits) up to the statutory limits. The assets and liabilities will be sold off, and all the assets will still exist, but some of the liabilities may disappear because they are over the guarantee limit. – Ron Maupin Sep 27 at 5:42
85

No, your debt is an asset. In bankruptcy assets might be sold off (there are different flavors of bankruptcy and they don't all involve complete asset liquidation). Your debt would either remain with them or be sold to another company.

| improve this answer | |
  • 2
    This sounds very correct, but is this 100% always true? There must be some counter examples to this, no? Has a bank going bankrupt never led to a dissolution of all debts in the last 50 years in the whole world? – Behacad Sep 25 at 13:22
  • 4
    @Behacad It's hard to prove a negative. But I can't really see circumstances where that would happen. Going bankrupt and liquidated means that any asset of value is sold to the highest bidder. I see no reason why nobody would be willing to pay any money at all to buy up all those outstanding loans of a bank. – Philipp Sep 25 at 13:43
  • 27
    @Behacad There's always a chance that things go missing/mistakes are made, so it's certainly possible that someone has accidentally been forgiven a significant debt, but it's not a feature of bankruptcy. – Hart CO Sep 25 at 13:53
  • 2
    @Behacad the most relevant bankruptcy for this question is chapter 7, where the company is liquidated. This means the assets (your debt) are sold off and the proceeds go to the creditors of the company. It's really no different at that point, from the debtors perspective, as a solvent bank selling off their mortgage portfolio to another company. Selling debt happens all the time, often without the debtor even realizing it. For example, you might get a car loan from Chevy and Chevy might immediately sell that loan to a wall street investor. You still owe the money. Bankruptcy is no different – eps Sep 25 at 14:45
  • @HartCO I read about a case where the spouse of a deceased flipped the 20k credit card balance on credit transfer promotions, paying no principle nor interest, without ever notifying the bank that the card holder is deceased. This was done for multiple years until the remaining spouse died. When the kids found out they tried to clear the debt but the credit card just wrote it off. Not really sure why since they never found out. – Nelson Sep 26 at 8:04
17

Absolutely not. Herstatt Bank went bankrupt in 1974. It took them about 20 years to collect all outstanding debt (bank going bankrupt when you have a 20 year loan means you still have 20 years to pay it back), with the result that the bank fulfilled 97% of its financial obligations, but it took twenty years.

Statute of limitations doesn’t matter. If you take a 30 year mortgage there is no statute of limitations that allows you to stop paying. Whether the bank is solvent or not.

| improve this answer | |
  • 6
    Limitation periods are relevant, just not in the way OP thought. A 20 year loan term means you are contractually bound to make payments for 20 years and limitation periods don't apply to the duration of the contract. However, if you fail to make a payment (a breach of contract) then the limitation period will limit the length of time that the other party has to seek a remedy for the breach. – JBentley Sep 25 at 11:50
  • 1
    @JBentley yes, I'm curious about this case... what if you're 28 years into your 30 year mortgage, your lender fails and you stop paying on it (perhaps you never figured out where to send payments?) and it takes 12 years to resolve the bankruptcy before someone tries to collect again? Do they forfeit the debt because no one sought remedy within the appropriate period after the contract breach? – Doktor J Sep 25 at 17:03
  • 3
    @DoktorJ in the (unlikely) case if it would take 12 years to resolve the bankruptcy, during these years the bank would still be run by (e.g.) a court-appointed administration whose primary duties would involve attempting to collect that debt during the process. I'm not a lawyer, but as far as I understand, if the institution would let that debt go uncollected and uncollectable, that would literally be a crime - a solvent company might just choose to forgive some debts, but if officials managing an insolvent company do so, that's defrauding the people to whom the insolvent company ower money. – Peteris Sep 25 at 19:57
10

The bank MUST sell your debt to someone else. It must because it is obliged to sell off its assets (your note) to satisfy its creditors.

The bank is not free to just leave your debt lying around in its inventory, going "la la la, I think I'll just leave these debts sit here unattended". The landlord, the county tax assessor, OfficeMax, the Acme Safe Company, etc. etc. are banging on their door going "Pay me!"

Once it's in bankruptcy, this is even more certain, since bankruptcy is essentially court oversight of the sell-off. So they MUST provide complete records and satisfactory answers to the court, and the creditors are watching like a hawk.

There is no way a file drawer full of mortgages are going to get "forgotten about". Let alone a computer full.

As R. Hamilton notes, a few got lucky in the mortgage bust in the 2010s, but that was more about punishing creditors for being careless and lying. That's not something you can take... to the bank...

| improve this answer | |
  • Yep no way: content.time.com/time/magazine/article/0,9171,2032110,00.html just no way at all: nytimes.com/2009/10/25/business/economy/25gret.html never happens: cnbc.com/2010/11/22/… I agree that it is rare for it to happen, but to summarily declare that there is no way for it to happen is just wrong. – R. Hamilton Sep 25 at 20:24
  • 2
    @R.Hamilton I said "are going to". Those mortgages were not forgotten, after all... only the source paperwork was mislaid and could have been tracked down eventually... but that didn't get the mortgages forgiven, lying to the courts/faking documents did. The forgives were the court's punishment for doing that. Anyway after those lessons learned, the industry isn't nearly that careless anymore. – Harper - Reinstate Monica Sep 25 at 21:11
  • 1
    "It must because it is obliged to sell off its assets (your note) to satisfy its creditors." Well, or just hand over those assets to the creditors. When a bankrupt company sells the assets, they're really selling them on their creditors' behalf. – Acccumulation Sep 25 at 21:15
  • @Acccumulation interesting idea, if all the creditors are agreeable to that. – Harper - Reinstate Monica Sep 25 at 21:22
8

This can unintentionally happen.

As the other answers have pointed out, what happens in bankruptcy (chapter 7 to be specific) is that another company buys the debt and life continues as normal for the debtor. From the debtors perspective it is no different than a solvent company selling off their debt to other companies, which happens all the time (particularly with mortgages and car loans). You might get your car loan from GM financial, and they might sell the loan to another company, but you still have to pay the loan.

But it is possible that in the shuffle the proof that you owe the money is lost:

https://www.nytimes.com/2017/07/17/business/dealbook/student-loan-debt-collection.html

Judges have already dismissed dozens of lawsuits against former students, essentially wiping out their debt, because documents proving who owns the loans are missing. A review of court records by The New York Times shows that many other collection cases are deeply flawed, with incomplete ownership records and mass-produced documentation.

While the article is about student loans in particular, other forms of debt have been wiped away in this manner. As I recall there were articles about this sort of thing in the aftermath of the 08 financial collapse, where some people's credit card debt was eliminated because the paperwork was lost.

| improve this answer | |
  • I've had the book Chain of Title on my shelf for a few years. This question and your answer make me want to pick it up. – Andrew Brēza Sep 25 at 17:34
  • 3
    A bankruptcy increases the likelihood of this happening, but this can happen in any sale of a business, and can even happen without any ownership transfer. There are cases where a bank goes to foreclose on someone, but when the court asks for the documents, the bank can't find them. – Acccumulation Sep 25 at 21:12
1

No

You would still owe whoever gets the banks assets.

| improve this answer | |