Does the Cosigner Have to Pay the Loan If There Is a Death?

Before you cosign, be aware of the risks.

Before you cosign, be aware of the risks.

If you have great credit, some of your friends or family might think you'd make a great cosigner. Cosigning a loan commits you to paying it off if the borrower defaults. In many cases, the lender may require a co-signer if the main borrower doesn't have a strong enough credit score, or has inadequate income. If the person you co-signed for dies, you may still owe the loan balance.

Cosigning Pitfalls

When someone dies, his estate is obligated to pay off his debts. If the estate doesn't have enough money, then you, as cosigner, are on the hook for whatever debt remains. Even if the estate has the money, the lender may be able to ask you to pay instead. The law in most states doesn't require lenders to collect from the borrower or his estate. If it looks easier to get the money from you, it's perfectly acceptable to come after you first.

Special Cases

If you cosign a federal student loan, and the student dies, those loans have a debt discharge that wipes them out. Some private student loans may offer a discharge, but many don't. Cosigning a house or auto loan is a special case because the asset is collateral for the loan. You can often settle the debt by letting the lender take the house or car back. That's going to hurt your credit score, however, as it goes down in your history as a loan you didn't pay off.

Sizing Things Up

Even if the main borrower doesn't die, she can still default on her loan, leaving you stuck paying it off. Before you agree to cosign, go over the borrower's finances. It may be the bank is right and he really can't pay off the loan, in which case cosigning might be a big mistake. Look at your own finances and how badly it'll hurt if the worst happens and you have to pay the loan back.

Taking Precautions

If you decide to go ahead and cosign, do your best to protect yourself. Get copies of the loan agreement in case there's a dispute over the terms. Ask the lender to notify you if a payment comes in late or the interest rate goes up. Try negotiating with the lender so that you don't have to pay fees or penalties. Get everything you agree to in writing. If you're really worried about the borrower dying, consider taking out enough life insurance on him to pay off the debt.

About the Author

A graduate of Oberlin College, Fraser Sherman began writing in 1981. Since then he's researched and written newspaper and magazine stories on city government, court cases, business, real estate and finance, the uses of new technologies and film history. Sherman has worked for more than a decade as a newspaper reporter, and his magazine articles have been published in "Newsweek," "Air & Space," "Backpacker" and "Boys' Life." Sherman is also the author of three film reference books, with a fourth currently under way.

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