What Happens to a Car Loan If the Borrower Dies & I'm the Co-Signer?

A co-signer on a loan is a person that guarantees the debt will be repaid. It's common for friends and relatives to ask for assistance with co-signing a loan if the applicant doesn't have good credit. However, as a co-signer, you may be responsible for the full balance of the loan for any reason---even if the debtor dies.

Co-signer Responsibilities

When you co-sign a loan for a borrower, you are being asked to repay the debt. In fact, creditors are required by federal law to give co-signers a notice that explains what a co-signer is and what your responsibilities are. The notice typically says you are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, it will be your responsibility.

When You Have to Pay

In most states, co-signers can be called upon to immediately collect a payment from you without contacting the borrower. You could also be subject to late fees or collection costs like attorney fees. If you don't pay, your wages could be garnished or a lien could be placed on your property. There is no part of the law that states you don't have to pay if the borrower is deceased, which means you'll probably be on the hook for the full amount.

Check the Paperwork

The loan contract will outline what happens if the borrower refuses to pay. In all likelihood, the car loan is a secured loan, which means that the car is held as collateral by the lender. In case of non-payment, the lender can seize the car and sell it. If there is a difference between the selling price of the car and what the lender is able to get at auction, you may be billed for the difference.

Negotiate

According to the Federal Trade Commission, three out of four co-signers are asked to make repayment for co-signed loans that are in default. You lender may not pursue you if the amount is small, or if they feel they will not be able to collect on the loan. There may even be a policy in place for bereavement; contact the note holder, explain the situation and ask them if they have any kind of bereavement policy.