6 smart moves when your bank goes bust

Bank sign on building

Most customers of banks or savings and loans that regulators seize and declare insolvent have little to worry about.

Remember those promos on bank commercials and Web pages about being "FDIC-insured"?

Under new rules in effect at least until Dec. 31, 2009, the Federal Deposit Insurance Corp. will repay individual and joint accounts up to $250,000 in one bank, no questions asked. Certificates of deposit or money market accounts held as part of an IRA also are insured for up to $250,000.

So, why were customers lined up around the block to reclaim their money after what is now IndyMac Federal Bank was seized in 2008?

An astounding 10,000 IndyMac customers had not followed one of the most basic rules of savings: Don't put more than the FDIC-insured limit in any one bank or account. Spread it around.

Here's what to do if you have money in any bank that might be in danger of failing:

Smart move 1. Figure out how much of your money is insured.

The FDIC's rules are surprisingly liberal and were just increased in October.

If your total deposits in one account category -- for example, single or joint -- at one institution are $250,000 or less, you're golden.

You can have one account in your name, one in the name of you and your spouse and one in just your spouse's name, and each one would be insured up to $250,000.

Smart move 2. Sit tight if all of your deposits are insured.

You'll be able to withdraw all or any part of your savings whenever you need it.

When a bank fails, federal regulators manage the business until they can deal with all of the bad loans and sell what's left of the business to another financial company. So you can still make deposits at a local branch, withdraw cash at ATMs, write checks and bank online.

Although the government usually waives early-withdrawal penalties, as it did at IndyMac, it also will honor the terms of most CDs.

So if you have a 12-month or 18-month CD at a great rate -- and IndyMac was offering some of the best rates in the country before it failed -- you can still collect.

Customers who pull their money out of a bank because they fear it might fail, will have to pay the early-withdrawal penalties. That's another unnecessary loss if you have less than $250,000 in total deposits.

Smart move 3. Spread your savings around if you have any uninsured deposits.

Consider IndyMac to be a great, big, wake-up call.

If you have more than $250,000 under one name in any one account, move the excess savings to another account or bank right now.

Start with the money in savings or money market accounts that don't impose early-withdrawal penalties and CDs that are maturing in the next month or two.

IndyMac will not be the last bank to fail because it made a bunch of bad loans -- primarily subprime mortgages. The FDIC now has 171 banks and thrifts on its "problem list," up from 117 in the second quarter of 2008.

It doesn't say which ones are in financial peril because it fears such a warning would cause customers to flee, making it even more likely they would fail.

But smart savers never worry about which banks are on the problem list. They know they're covered if they don't have more than $250,000 under one name in any bank.

Smart move 4. File a claim with the FDIC for deposits that aren't insured.

Your first $250,000 is automatically covered, and you'll get most of any additional, uninsured deposits back.

At IndyMac, for example, customers were allowed to immediately withdraw up to the FDIC-insured limit plus half of all uninsured deposits in excess of that.

You can then make an appointment with the FDIC to file a claim for the remaining money.

It may take months, or even years, to collect, but government managers usually find a way to repay about 70% to 80% of all uninsured deposits.

Smart move 5. Shop around for the best rates.

While the FDIC will continue to pay the interest rates promised by your defunct bank, it won't necessarily offer the best rates when it's time to renew.

That's especially true because banks on the verge of insolvency often will offer the most lucrative rates in an attempt to keep customers from fleeing. You'll almost certainly be paid less if you allow CDs to automatically roll over.

Just before it was seized, IndyMac was offering one-year CDs for 4.45% -- far more than any other bank in the country.

When the FDIC took over, it immediately cut that rate to 4.15%. We expect IndyMac's CD rates will continue to fall back toward the national average over the next few months.

Our extensive database of the best CD rates is a good place to start looking for rates.

Smart move 6. Be prepared to have your home equity line of credit frozen.

The FDIC has frozen all of IndyMac's home equity lines of credit. Those customers can no longer borrow money against their homes until their account has been reviewed and re-approved.

That's not surprising.

IndyMac and many other lenders, including Chase, Bank of America, Washington Mutual and USAA Federal Savings Bank, have already frozen 600,000 accounts nationwide.

Homeowners who live in what's considered a distressed housing market -- such as California, Florida, Arizona and Nevada, where prices have declined 10% or more -- have been particularly vulnerable to being cut off.

If you depend on a home equity line of credit for your emergency fund, take some money out now and save it.

That's especially good advice if your HELOC is from a bank or thrift suffering from a string of unprofitable quarters and a rapidly falling stock price.

Yes, taking out the money now will cost you a little. If, for example, you borrowed $20,000 at 5% and put it in a CD earning 3.5%, you'd pay about $25 a month more in interest than you earned.

But you'll have peace of mind knowing that the money's there when you need it.

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