If someone dies with outstanding debt, such as a car loan, that debt does not simply disappear. In most cases, the deceased person's executor, administrator, or personal representative is responsible for paying any money owed with that person's estate.
Understanding the Estate
When a person dies, all of that person’s debts and assets combined make up their estate. It's the total monetary value of everything they owned at the time of their debt, including checking, savings, and investment accounts, as well as land or businesses in which the person had a controlling interest.
This estate will pay off the balance of outstanding debts, including any car loans, using the available assets—if there are enough funds to do so.
If the deceased had an estate plan and left a will or had a trust, the documents will name an executor. The executor is the person who is responsible for settling and distributing the estate to the beneficiaries. However, if someone dies without a will, a probate court will assign an administrator—usually a surviving spouse or close relative—to this role.
Some lenders provide the option to purchase credit insurance along with a loan. This type of coverage can be helpful when one member of the family is the primary breadwinner but both spouses cosign on a loan.
If the deceased person purchased credit life insurance on an auto loan, that insurer is responsible for paying all or part of the balance of the loan after death, depending on the terms of the agreement.
Co-signers and Debt
Co-signing is when two or more people cooperatively borrow on a loan. Sometimes this is done if one individual does not have a strong enough credit history to acquire the loan independently.
If the car loan was co-signed by a surviving relative, that co-signer is responsible for paying any remaining balance not covered from estate assets if the deceased did not purchase credit insurance. This is true whether or not the co-signer inherits the car. In fact, it's true of any loan that was co-signed by a surviving person, including mortgages and home equity lines of credit.
If the cosigner fails to continue the payments, the account could go into collection, the car could be repossessed, and the cosigner’s wages could be garnished, depending on the laws of the state where they live.
Surviving Spouse Rights
If someone purchases a car or takes out an auto loan in most states, once they die, their estate or any surviving co-signers will be responsible for paying the balance of the auto loan. However, if they are not co-signers on the note, surviving spouses, relatives, and other beneficiaries will not be responsible for paying any debts.
Some predatory lenders will harass survivors of the deceased regardless of whether they are co-signers. They may also hire a collection agency to do so. However, if they are not co-signers on the note, surviving spouses, in general, relatives, and other beneficiaries will not be responsible for paying any debts. There are exceptions, however, based on state law that may require a surviving spouse to satisfy some or all of the remaining debt. If you're uncertain about your particular situation, contact your state Attorney General's office for more information.
Community Property States
The law is different in nine states and Puerto Rico, which are considered community property states. The states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. The state of Alaska is considered a hybrid state, meaning it allows for community property in some instances.
In a community property state, any property or assets purchased by one spouse during a marriage—as well as any loans taken out—become jointly owned by and the responsibility of the other spouse. That means if a deceased person had a $10,000 outstanding auto loan balance, the spouse is liable for $5,000 of that loan. This is true even if the surviving spouse's name was never on the loan or the title of the car.
With a community property state, it will not matter if the title of the property or the loan is listed in only one name. Any income is also viewed as joint property. However, inheritances and gifts will remain the property of only the spouse that received them.
Surviving relatives other than spouses are not subject to community property rules.
Unsecured vs. Secured Car Loans
A secured loan is backed by collateral. In this case, that’s the car. If payments on a secured car loan stop for any reason, including the death of the person who signed the agreement, the lender can repossess the car and sell it to cover the unpaid portion of the loan.
An unsecured loan, on the other hand, has no collateral. The vast majority of car loans are secured loans, but people with good credit sometimes choose to take out an unsecured auto loan. In this instance, if the person dies, the car loan is no different than any other unsecured debt like a credit card or personal loan. It will become the responsibility of the estate and any co-signers to satisfy the lender.
What to Do If a Loved One Dies
If a friend or relative dies, it is important to send a certified death certificate to all lenders and the major credit bureaus. This prevents fraudulent activity, such as new accounts being opened in the name of the deceased person. It also allows any debts to be settled appropriately.
If the deceased person had substantial outstanding debt, it’s a good idea to hire a probate attorney who can handle these financial matters on behalf of the deceased.
If You Decide to Keep the Car
If the person named as heir to the car in the will or other surviving friends and family members are interested in keeping the car, it’s important to keep up the payments to avoid having the car repossessed before a decision is made.
If a surviving family member decides to keep the car, it will need to be processed by a probate court in order to ensure the person is the legal heir and to transfer the title.
The new owner will also need to pay any state registration fees or taxes, take out auto insurance in their own name, and refinance the car loan or pay off the balance of the loan in full.
The information contained in this article is not tax or legal advice and is not a substitute for such advice. State and federal laws change frequently, and the information in this article may not reflect your own state’s laws or the most recent changes to the law. For current tax or legal advice, please consult with an accountant or an attorney.