Understanding the Estate
When someone dies, all their debts and assets together form their estate. It is the total cash value of everything they owned at the time of death, including checking and savings accounts, investment accounts, as well as any real estate or businesses they owned outright.
This estate will pay off any outstanding debts, including car loans, using the available assets – if there are sufficient funds for that.
If the deceased had an estate plan and left a will or had a trust document, these documents will appoint an executor. The executor is the person responsible for settling and distributing the estate to the beneficiaries. However, if someone dies without a will, a probate court will appoint an executor – usually the surviving spouse or close relatives – for this role.
Credit Insurance
Some creditors offer the option to purchase credit insurance with the loan. This type of coverage can be beneficial when one family member is the primary borrower, but both spouses are on the loan.
If the deceased purchased credit life insurance on a car loan, that insurance company is responsible for paying all or part of the loan balance after death, depending on the terms of the agreement.
Co-Signers and Debt
A co-signing is a process where two or more people collaboratively borrow on a loan. This is sometimes done if one person does not have a strong enough credit history to obtain the loan independently.
If a car loan was co-signed by a surviving relative, that co-signer is responsible for paying any remaining balance not covered by the estate’s assets if the deceased did not purchase credit insurance. This is true whether the co-signer inherits the car or not. In fact, this is true for any loan co-signed by a surviving person, including mortgage loans and home equity lines of credit.
Note: If the co-signer fails to continue payments, the account may be handed over to a collection agency, the car may be repossessed, and the co-signer’s wages may be garnished, depending on the laws of the state they live in.
Rights of the Surviving Spouse
If someone bought a car or car loan in most states, upon their death, the estate or any surviving co-signers will be responsible for paying off the car loan balance. However, if they are not co-signers on the note, the surviving spouse and other relatives or beneficiaries will not be responsible for paying any debts.
Some unscrupulous creditors may harass the survivors of the deceased regardless of whether they are co-signers on the note. They may hire a collection agency to do so. However, if they are not co-signers on the note, generally, the surviving spouse and other relatives or beneficiaries will not be responsible for paying any debts. Nonetheless, there are exceptions, according to state law, which may require the surviving spouse to pay some or all of the remaining debts. If you are unsure about your specific situation, please contact your state’s Attorney General’s office for more information.
States that Consider Community Property
The law is different in nine states and Puerto Rico, which are considered community property states. The states include Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Alaska is considered a hybrid state, meaning it allows community property in some cases.
In a community property state, any property or assets acquired by one spouse during the marriage – along with any debts incurred – are considered joint property and the responsibility of the other spouse. This means that if the deceased had an outstanding car loan balance of $10,000, the spouse is responsible for $5,000 of that loan. This is true even if the surviving spouse’s name is not on the loan or the title of the car.
Note:
The surviving relatives who are not spouses are not bound by the community property rules.
Secured Loans vs. Unsecured Loans for Cars
A secured loan is a loan backed by collateral. In this case, that collateral is 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. This can be avoided if the estate sells the car, but court approval may be needed for that because the car and loan would be part of the deceased’s legal estate.
On the other hand, an unsecured loan has no collateral. The majority of car loans are secured loans, but people with good credit sometimes choose to take out an unsecured car loan. In this case, if the person dies, the car loan is treated like any other unsecured debt, such as a credit card or personal loan. The estate and any co-signers will be responsible to satisfy the creditor.
What to Do If a Close Family Member Passes Away?
If a friend or family member passes away, it is important to send a certified death certificate to all credit agencies and major credit bureaus. This prevents fraudulent activity, such as opening new accounts in the deceased person’s name. It also allows for any debts to be settled properly.
If the deceased had significant outstanding debts, it is advisable to hire an estate attorney who can handle these financial matters on behalf of the deceased.
If You Decide to Keep the Car
If the person named as the heir to the car in the will or other surviving friends and family members are interested in keeping the car, it is important to continue making payments to avoid repossession before a decision is made. If a surviving family member decides to keep the car, it will have to be processed through probate court to ensure that the person is the legal heir and to transfer the title.
The new owner will also need to pay any registration fees or state registration taxes, purchase car insurance in their name, and either refinance the car loan or pay off the loan balance in full.
Frequently Asked Questions
What happens to a lease when someone dies?
A lease may automatically terminate if the person who rented the vehicle passes away. If this does not occur, the estate is responsible for any remaining lease payments or penalties. A surviving family member may decide to take over the lease if the terms allow for it.
Who owns the car after death?
If the owner left a will, it may specify who will inherit the car. Otherwise, the court will make those decisions.
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Sources:
– Consumer Financial Protection Bureau. “If Someone Dies Owing a Debt, Does the Debt Go Away When They Die?”
– The Judicial Council of California. “Wills, Estates, and Probate – Step 1: Figure Out Who Will Be The Estate Representative.”
– Consumer Financial Protection Bureau. “What Is Credit Insurance for an Auto Loan?”
– Federal Trade Commission. “Debts and Deceased Relatives.”
– Debt.org. “Debt of Deceased Relatives.”
– Consumer Finance Protection Bureau. “Can I Be Responsible to Pay Off the Debts of My Deceased Spouse?”
– Consumer Financial Protection Bureau. “Can I Be Personally Responsible for Paying My Deceased Relative’s Debts and Can a Debt Collector Contact Me About Those Debts?”
– Internal Revenue Service. “Basic Principles of Community Property Law – Community Property Law.”
– Internal Revenue Service. “Basic Principles of Community Property Law – Title.”
– Internal Revenue Service. “Basic Principles of Community Property Law – Gifts to Spouses.”
–
Experian. “What Happens to Debt When You Die?”
– National Credit Union Administration. “Personal Loans: Secured vs. Unsecured.”
– The Judicial Council of California. “Wills, Estates, and Probates.”
– Maryland Department of Transportation. “You’ve Inherited a Vehicle.”
Source: https://www.thebalancemoney.com/what-happens-to-car-loans-after-death-4135465
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