What Happens to a Car Loan When Someone Dies?
The death of a relative or loved one is never a pleasant experience, and figuring out how to settle their financial affairs often only adds to the pain. If the deceased person left a new car behind, there’s a very good chance that they also left behind a hefty car loan. There are a lot of factors that go into determining if and how that loan balance is paid off, and ultimately, who is entitled to possession of the car. If you’re in the position of being left 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 their outstanding debts. Fortunately, in the majority of states, they don’t have to.
When a person passes away, all of their debts and assets combined make up their 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 a person left a will, the document will name an executor, who is the person responsible for settling and distributing the estate. If a person 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 their auto loan, this insurer is responsible for paying all or part of the balance of the loan, depending on the terms of the agreement.
If the estate does not have the funds to cover the remainder of the car loan, and if no credit life insurance was purchased, and the car loan was cosigned by a surviving relative, that relative is responsible for paying the remaining balance of the loan, regardless of whether or not they inherit the car itself. This is true of any loan that was co-signed by a surviving person. If this person fails to continue payments, the car may be repossessed and/or the cosigner’s wages may be garnished, depending on the state.
Community Versus Noncommunity Property States
If someone purchases a car or takes out an auto loan in a non-communal property state, once they die, their estate or any surviving cosigners will be fully 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, nine states (Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington and Wisconsin) and Puerto Rico are considered community property states, and the laws there are more complex.
In a community property state, any property or assets purchased by one’s spouse during the marriage, as well as loans taken out, are jointly owned by and the responsibility of the other spouse. That means if a deceased person has a $10,000 outstanding auto loan balance, if they pass away, their spouse is liable for $5,000 of that loan — even if their name was never on the loan or on the title of the car. Surviving relatives other than spouses are not subject to these rules.
A secured loan is a loan that is backed by some type of collateral — in this case, the car owned by the deceased person. If payments on a secured car loan cease for any reason, including the death of the person who signed the agreement, the lender can repossess the car and sell it to cover any unpaid portion of the loan.
An unsecured loan, on the other hand, has no collateral. Though the vast majority of car loans are secured loans, persons with excellent credit sometimes are able to take out an unsecured auto loan. In this instance, if the person dies, the car loan is no different than any other sort of unsecured debt, like a credit card or personal loan: it is the responsibility of the estate and any cosigners of the loan, 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 from taking place, including new accounts being opened in the name of the deceased person, and allows the debts to be settled appropriately. If the deceased person had a lot of 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 potentially keeping the car, it’s a good idea to keep making payments on any unsecured car loans to avoid having the car repossessed before a decision is made.
If a surviving family member ultimately 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 for 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 like applying for the loan all over again.