Although your family members aren't typically liable for your debts after you die, that does not mean that debts you owe die with you. Your car loan is a secured debt, and your lender holds the title to the vehicle until the loan is paid off. Someone must assume responsibility for paying off your car loan when you die lest the lender will seize the vehicle.
Paying the Loan
When you die, the executor of your estate will inform your creditors of your death. All lenders' policies differ, but your family members must ultimately choose between assuming payments on the vehicle or surrendering it to the lender. If your family chooses to surrender the vehicle, the lender will sell it and keep the proceeds as payment for the loan. If you owed more on your car than it was worth, your lender cannot hold your loved ones responsible for the deficiency, but it can file a claim for payment with the probate court managing your estate.
Credit Insurance
When you finance a vehicle, you have the option to purchase credit insurance. Credit insurance pays off your loan should you die or become permanently disabled. If you carried credit insurance on your car loan, your family can file a claim with the insurance company for the remaining balance of your loan. The insurance company will then pay off your vehicle loan and the car becomes the property of the individual you specified in your will or your next of kin.
Potential Liability
In most cases, your family members are not liable for your car loan when you die. Exceptions exist, however, in community property states. If you live in a community property state, the lender can hold your spouse legally liable for assuming the payments on your car loan---even if the loan is in your name only.
The same is true for a friend or family member co-signed with you to help you qualify for the loan. By co-signing, your loved one signed an agreement with the lender to pay off your loan if you could not do so. In the event of your death, responsibility for payment would then fall to the co-signer.
Collection Activity
If your debts exceed your assets, you are considered insolvent and do not leave behind an estate that creditors can file claims against. Should this occur and your family chooses not to repay your car loan, the lender may hire a collection agency to collect any remaining loan deficiency from your loved ones after selling the vehicle.
While your loved ones may wish to pay off your auto loan debt for moral reasons, they are not legally obligated to do so and federal law prohibits debt collectors from threatening your family members with either legal action or credit damage should they neglect to pay off the loan's remaining balance.
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