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 and outstanding debts or loans only adds to the pain. 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.
Understanding the Estate
When a person dies, all of that person’s debts and assets combined make up an estate. The estate is the total of the value of all assets or their net worth. This value may include checking, savings, and investment accounts as well as land or businesses in which the descendant 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 administrative role.
Credit Life Insurance
Some lenders provide the option to purchase credit life insurance along with a loan. This policy holds a death benefit that decreases as the loan is paid down. This type of coverage most appeals when one member of the family is the primary breadwinner but both spouses cosign on the loan.
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.
Cosigners and Debt
Cosigning 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 on independently. Also, the terms of the loan may be more beneficial with a cosigner.
If the car loan was cosigned by a surviving relative, that cosigner is responsible for paying any remaining balance not covered from estate assets or if 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 including mortgages and home equity lines of credit (HELOCs).
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. However, if they are not cosigners 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 if they are cosigners or not. They may also hire a collection agency to do so. It is important to know that these survivors are not responsible for making any payments if the loan was not made or cosigned in their name unless they are in a community property state.
Community Property States
However, the law is different in nine states and Puerto Rico that are considered community property states. 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.
The states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. The state of Alaska is a hybrid state and allows community property in some instances.
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 these 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 cosigners 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.
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.
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.