What Happens to a Car Loan When Someone Dies?
The death of a loved one is never a pleasant experience, and settling that person’s financial affairs only adds to the pain. If you have to settle someone’s financial affairs who had an outstanding car loan after he or she has died, it’s important to know the facts and your rights.
When a Person Dies, an Estate Is Born
When someone dies, the last thing friends and family members want to think about is settling outstanding debts. Fortunately, in most states, they don’t have to.
When a person dies, all of that person’s debts and assets combined make up an estate. This estate will pay off the balance of outstanding loans, including any car loans, using available assets if there are enough funds to do so.
If the person left a will, the document will name an executor, who is the person responsible for settling and distributing the estate.
If someone dies without a will, a probate court will assign an administrator, usually a surviving spouse or close relative, to this administrative role.
Credit Life Insurance
Some lenders provide the option to purchase credit life insurance. If the deceased person purchased credit life insurance on the auto loan, that insurer is responsible for paying all or part of the balance of the loan, depending on the terms of the agreement.
If the loan was cosigned by a surviving relative, the cosigner is responsible for paying the remaining balance if the estate does not have the funds to cover it and no credit life insurance was purchased. This is true whether or not the cosigner inherits the car. In fact, it's true of any loan that was co-signed by a surviving person.
If the cosigner fails to continue the payments, the car may be repossessed and the cosigner’s wages may be garnished, depending on the state.
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 cosigners will be responsible for paying the balance of the auto loan. Surviving spouses, relatives, and other beneficiaries will not be responsible for paying any debts.
Some predatory lenders will harass survivors of the deceased regardless, or hire a collection agency to do so. But it’s important to know that these survivors are not responsible for making any payments if the loan was not made or cosigned in their name.
However, the law is different in nine states and Puerto Rico. They are community property states, and the laws there are more complex. The community property states are Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin.
In a community property state, any property or assets purchased by one’s spouse during the marriage, and any loans taken out, are 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.
Surviving relatives other than spouses are not subject to these rules.
Unsecured Versus 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 is the responsibility of the estate and any cosigners, not any surviving relatives or heirs of the car, and the car cannot be repossessed to cover the balance of the loan.
What to Do If a Loved One Dies
If a friend or relative dies, it is important to send a 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.
What to Do 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.
If the loan is to be refinanced, the new owner will need to provide proof of vehicle ownership and prove their creditworthiness through proof of income or assets, or a cosigner — simply possessing the car won’t be enough. It will, in effect, be a new application for a loan.