If A Cosigner Dies, What Happens To The Loan?

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manny

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Published on October 22, 2020

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If you have a poor credit history or a less than stellar credit score, lenders will think twice before granting you a loan. The solution? Get a cosigner. Having a cosigner is like having a lifeline when you’re not eligible to get approved for a loan. In some instances, it can even give you a more favorable deal if your cosigner has an excellent credit history.

Getting a cosigner is not always easy. Usually, cosigners are family members, close friends, or business partners who trust you to make your loan payments on time. That is because cosigners are equally responsible for the loan even if they did not benefit from the money you owe. 

But what happens if your cosigner passes away? What will happen to your loan? If you have a mortgage, what happens when the mortgage cosigner dies? How about when it comes to car loans and student loans? Below, we answer some of the most common questions related to this topic.

What happens If The Cosigner On Your Loan Dies?

When someone close to you dies, it can be a very difficult situation, not only emotionally but financially as well. If you have financial ties to that person, you have to sooner rather than later sort these out to avoid any future problems. One of the common concerns is when this person cosigned a loan with you. What happens to the loan?

There are different types of loans such as personal loans, mortgage, student loans, and car loans. Depending on your loan agreement, different scenarios could occur if a cosigner passes away. Generally speaking, what happens when a cosigner on a loan dies is that the liability falls entirely on the primary borrower. 

If you are the primary borrower, as long as you keep on making on-time payments, there shouldn’t be any problem. Most of the time, you could continue paying the loan payments without any consequence. However, if you have already defaulted by the time your cosigner dies, the lender could recoup the money from the estate of your deceased cosigner. This is usually the case for different types of loans such as personal loans, mortgage, car loans, and student loans.

Do I Need to Pay the Full-loan Amount Immediately Once my Cosigner Dies?

If you are worried whether you would need to pay the loan amount in full once your cosigner dies, you have to check your loan agreement. There are certain clauses that stipulate what will happen if your cosigner dies. As mentioned, many loan agreements will allow you to proceed with the agreement as long as you make your payments on time. However, there are certain clauses that could force you to pay in full. 

One clause that you should look for is the “Automatic Default Clause”. If this clause is on your loan agreement, the loan balance becomes due immediately when your cosigner dies. It does not matter whether the primary borrower is current in all the payments, the loan balance will have to be paid ASAP.

Automatic Default Clauses are popular with private student loans. Many students usually have their parents or grandparents cosign their student loans with them. When the cosigner dies, this leaves the student in risk of defaulting even if the payments are always on time.  In recent years, however, many lenders have changed their policies and eased their rules on automatic defaults so that when the cosigner dies, the student will not be forced to pay the loan balance in full immediately. Rather, they will be given the chance to find another cosigner or to refinance the loan. 

For example, let’s say that you have a private student loan and your cosigner is your grandmother. If your loan agreement has an automatic default clause, this means that you would have to pay the remaining balance of your loan in the event your grandmother dies. This could be problematic especially if you do not have the required amount of money to cover the loan amount immediately. What can you do so you won’t default on your loan?

If this automatic default clause is on your loan agreement, you have different options. First, you could try to talk to the lender so you can assume the loan by yourself. If you have a good payment history and your credit score is up to scratch, the lender may allow you to just continue on with the old agreement.

Another option is to refinance the loan. When you refinance your loan, this means you’re getting a new loan to pay off your old debts. Again, if you have a good credit standing, it might even be more favorable for you to get a new loan as you could get a better deal and more favorable terms.

Do I Need to Find Another Cosigner if my Cosigner Dies?

One common question that borrowers ask is whether it is required to get a new cosigner if the loan cosigner dies. Is this really necessary? Usually, the answer to this question is no. When your cosigner dies, you do not need to find another cosigner as the estate of the deceased cosigner becomes the new cosigner. If you default on the loan, the lender could go after the estate of the deceased cosigner.

However, there is one instance when you may need to find a cosigner. This is when you want to refinance your loan. If you have a good credit standing, refinancing the loan on your own will not be an issue. However, if you have a bad credit score, the lender might not approve to refinance your loan. Some lenders will require you to find another cosigner to give you approval.

Will my Car or House Get Repossessed When my Cosigner Dies?

If you have a car loan or a mortgage, you might be worried that you might lose your car or your house in case your cosigner dies. If you are making all your payments on time, this is really not something you should worry about. At the end of the day, the lender’s primary concern is that you are able to cover the monthly payments. If you are not making the payments or have defaulted on the loan, this is a different story.

Car loans and mortgages are secured loans, which means that even if your cosigner is still alive, you could lose your car or your house if you are not making any payments. This will also be the case if your cosigner dies. While the lender may try to recover the payment from the estate of the deceased cosigner, not being able to make the payments means losing your car or your house.

As discussed in the earlier section of this article, if the loan agreement has an automatic default clause, you might be required to pay the loan balance immediately. In case you are unable to do so or unable to refinance the loan, some lenders could repossess your property.

Should I Inform my Lender that my Cosigner Died?

If your cosigner dies, you might hesitate to inform your lender about this development. The common worry is whether it will affect your loan. Some borrowers may even consider hiding this from the lender thinking that if the lender is not aware of this fact, everything will just go on smoothly. Not informing your lender, however, could backfire on you.

For example, if your loan agreement states that you have to inform the lender that your cosigner died, not doing so could be a breach of contract. If your lender finds out that your cosigner died, this could lead to some legal or financial issues. The worst that could happen is that the lender could place your loan on automatic default.

If you inform your lender proactively, then you could renegotiate the terms of your loan and explore what options are available to you. This gives you more room to prepare yourself financially so you will not be caught off-guard in case the lender takes an unwelcome decision.

Will the Family of the Deceased Cosigner be Liable for the Loan?

The pain of having a family member pass away can be unbearable. You have to deal with the grief associated with your loss. When you learn that your deceased family member cosigned a loan, it is natural to worry whether you will be liable to pay for this loan. The good news is that if you are a beneficiary of the cosigner, you cannot be held liable for the debt. The estate of the deceased, cosigner, however, could still be liable. How does this work?

One of the pitfalls of being a cosigner is that they are equally responsible for the debt of the borrower. If the borrower is unable to pay, the lender can come after the cosigner to pay the loan on the borrower’s behalf. So, what happens if the cosigner dies? If the loan agreement has a “successor clause”, the estate of the cosigner will be liable for the debt if the primary borrower defaults on the loan. The estate has to typically pay off the liabilities before the assets are distributed as inheritance. For the family members of the cosigner, this could mean that they will not get any of their inheritance until the creditor recovers the money owed. 

If the estate of the cosigner is unable to cover the debt, it will not transfer to the heirs. If the loan agreement does not include a successor clause, the responsibility of the cosigner usually ends there.

What Happens to the Cosigner if the Primary Borrower Dies?

Let’s reverse the situation this time. What if you are the cosigner on a loan and the primary borrower dies? 

As you have cosigned the loan, you are liable to pay off the loan and the lenders could come after you. You might be relieved to know, however, that the lenders will first try to recover the money from the estate of the borrower (remaining assets) before they try to ask you to pay the loan. This is usually the case if it is a private loan.

Are there Loans that Could be Discharged if the Primary Borrower Dies?

In some cases, loans could be discharged in case the primary borrower dies but this will really depend on the loan agreement. Federal student loans, for instance, are discharged in the event that the student who is the borrower dies. If a parent has a Direct PLUS Loan, which is a loan taken to pay for the education of a dependent student, this loan will also be discharged if the parent or the student on whose behalf the parent obtained the loan dies. A proof of the death will need to be provided for the loan to be discharged.

If the student loan was obtained from a private lender, there may be some who will discharge the debt if the student dies. However, there are also some private lenders who will attempt to claim the loan balance from the estate of the deceased or from the cosigner.

Be Proactive if Your Loan Cosigner Dies

In the unfortunate event that your loan cosigner passes away, immediately review your loan agreement to see what are the clauses stipulated in the contract. Don’t hesitate to contact the lender to discuss your available options. This will put you in better control of the situation. Avoiding the issue will only delay the inevitable and could put you at a disadvantage later on.

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