On Friday, January 30, 2026, the first bank failure of the year occurred when Metropolitan Capital Bank & Trust of Chicago failed. While Metropolitan Bank was a relatively small bank, it was an IOLTA approved institution for Illinois and perhaps other states.
Which leads to the question… what do I do if my bank fails and I, as a lawyer, have trust money in that bank?
FDIC Insurance Protections for Trust Accounts
The good news is that your trust account will likely be protected in the case of bank failure. The FDIC insures up to $250,000 per depositor, per insured bank, for each account ownership category.
When it comes to trust accounts, where we hold money for other people, then the insurance coverage is extended per client or beneficial owner and not per law firm. This is great news for those that have funds in one account for multiple clients or beneficial owners above the $250,000 limit.
However, this may be limited if the beneficial owner also has funds in the same account. For example, if both of you bank at the same bank, and you have a $200,000 settlement for them in your trust account but they also have $100,000 in their own accounts. They would be above the $250,000 limit and could potentially lose out on $50,000.
In recent bank failures, like the SVB crash in 2023, the FDIC has decided to cover amounts over the $250,000 insurance limit to prevent other problems in the economy. But they are not required to do so.
Spread the Risk
Since the higher limit or coverage is not guaranteed, it is wise for any lawyer or other person holding funds for a third party to ensure that their trust accounts are properly insured if they are above the $250,000 FDIC limit.
Most banks have specialized sweep accounts where they distribute the funds across multiple banks, so that each account has its own insurance coverage. But you still have to deal with only one institution.
Best Practices for Risk Mitigation
One of the best ways to reduce your risk related to bank failure is to get it out of your account as soon as possible. This is also great client service, leading to higher client satisfaction. Basically, we don’t want funds sitting around for long periods of time – ideally less than a week, but definitely less than a month.
And if, for some reason, you cannot disburse those funds to a client (they moved, stopped contact, or died), then you need to consider turning the funds over to the state as unclaimed property.
The goal is to make sure that you don’t have any unnecessary funds in your trust account any longer than you need to.
The Bank Failed… Now What?
Once a bank fails, you typically will not receive advance notice. This is to prevent an old fashioned bank run, where everyone rushes to get their money out. So when the bank fails, you’ll be locked out of your accounts, at least temporarily.
When Metropolitan Bank failed, the FDIC was named as the receiver. It then made a deal with First Independence Bank to accept all the deposit accounts, except certain brokerage deposits. This would include your IOLTA account.
What if I already bank with the new assuming bank?
Many of us have multiple financial institutions, as a way of spreading our risk. If you already have an account with First Independence, your old Metropolitan accounts are covered by FDIC insurance separately from your existing First Independence accounts for six months.
But in that time, you’ll need to make new arrangements to ensure that all your combined balances will continue to be insured.
Step 1: Get Your New Login Credentials
Once the new assuming bank is announced, and it is normally announced very quickly, you will need to get your new login credentials for online banking. In many cases, your old logins will remain working for some time, but that is not always the case.
You will want to watch for any email or snail mail correspondence from the old bank, the new bank, the state regulator (in the case of Metropolitan Bank that would be the Illinois Department of Financial and Professional Regulation), and the FDIC. Be very wary though because scams are common around bank failures and you do not want to be a victim!
Step 2: Verify Funds and Transactions
After you have received new login information (or can continue to use your old logins), you need to verify the funds in your accounts. This should be cross-referenced with your law practice management system and your accounting records to ensure that everything is there.
If you have any funds missing, particularly in your IOLTA, you need to contact the bank immediately. This will become your biggest nightmare, not going to lie. You may have to prove amounts owed to each client during this process, so make sure that your IOLTA records are squeaky clean.
Step 3: Download Your Account Statements
While you are hanging around in your online bank account, you should download all available account statements. One thing that is common with bank failures is that these things become lost in the shuffle. You regularly rely on the bank having them, but as the new assuming bank consolidates platforms and operations, the statements become more difficult to access. So while it is easy, go ahead and grab all of them and save in your firm’s file storage.
Step 4: Contact Payers for New Routing Information
Expecting a fat settlement check to come in today? It’ll probably work, according to the FDIC.
But eventually the new bank will issue new routing and account numbers for your accounts. You’ll want to stay on top of this as the weeks and months go by.
I know some insurance companies can take months to pay out on personal injury settlements, so keep in mind that you may have to be chasing down payments for a long time into the future.
Don’t forget about other people that pay you money, whether into your operating account or trust account. People like your credit card processors will need the updated payment instructions once those are made available.
Step 5: Update the People You Pay (or People who Pay People for You)
Once the new routing and account information is made available, you will also need to update the people you pay that draw from your accounts like payroll processors. Or systems that you pay people through like Bill.com.
What About Loans?
Sorry to say, but your loan isn’t going away just because the bank failed. I know, bummer.
In fact, nothing will really change. You don’t even get a break for your troubles here. Your due dates and obligations under the loans remain.
If you are behind or delinquent on your loans, the FDIC will set off the amount owed by any amount help in deposits. One way to make sure that you get the benefit of deposits that over the FDIC limit may include a voluntarily set off against an outstanding loan. For example, if you have $350,000 in a deposit account, but not your IOLTA because those are client funds, and you owe $100,000 on a line of credit, you could pay off the line of credit and still get the full $250,000 of your deposit account. Maybe not the best set of circumstances but better than losing the $100,000 above the FDIC insurance limit and still owing it on the line of credit.
If you have a line of credit, there are several possibilities that may happen here. The new bank may decide to keep it open, may close it, or may require modification, such as lower limits or additional underwriting. Don’t be surprised (and prepare for) the potential that the new bank may close or significantly lower the limit on your line of credit. You’ll need to talk to your loan officer though for specifics.
What Happens if No Bank Steps Up to Assume the Failed Bank’s Accounts?
When a bank fails, the FDIC can often arrange for another bank to step in and assume or buy the failed bank’s accounts. However, this isn’t always possible. For example, if there is a high level of fraud among the failed bank’s accounts, a new bank is unlikely to want those accounts. Or if there are a lot of failed banks in a short period of time, there may not be a bank that is in the position to assume more accounts at that moment.
In that case, the FDIC will issue checks to the account holders. This usually begins within a few days. Watch for notices from the FDIC and the bank and definitely watch your mail.
If the FDIC cannot get a new bank to assume the failed bank’s accounts, you, as a fiduciary, may have to provide a list of names for each person owed money from your IOLTA. The FDIC will then pay you and you will be responsible for further disbursements.
Also, it is worth noting that if there is no successor bank, then all deposits and payments not already completed will fail. This means a check will be returned to the payee as unpaid, bank closed. You will likely be contacted by a lot of angry people, so bring your best customer service self to the situation.
Get Help Managing a Failed Bank Crisis
If you bank is failing or failed, you may not want to go it alone. That’s where Springboard Legal comes in! Through our Fractional CFO services for law firms, we can help you manage the process of getting a new bank, closing out old transactions, and ensuring that you have the proper records going forward.
This is a big, daunting process. But the good news is that you do not have to go it alone.
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