You might be able to get out of a loan if your co-signer dies, or the bank could come after you, which might destroy your credit and put you into bankruptcy if you cannot afford the loan. How a bank handles a loan when the co-signer dies depends on the provisions of the loan and the classification of the borrower at the time of death.
Identification
One of two things may happen when the co-signer dies: you take over payments on the loan or the lender cancels the debt. The actual course of action depends on the agreement with the bank when you took out the loan. The lender is likely to cancel the debt only if the co-signer was the primary borrower. Some loans, such as student loans, may stipulate that lender automatically cancels the loan in case of death of the primary borrower.
Considerations
When you co-sign a loan you have to prepare to assume payments on the account, because that is the legal duty of a co-signer. Up to 75 percent of borrowers report that a bank pursues them for payment when the co-signer does not meet his obligation, according to the Federal Trade Commission. If you cannot pay the loan, late payments usually lower your credit score several dozen points and the creditor may sue you for payment.
Considerations
The bank may pass the debt onto the deceased's estate, in which case you may not be able to assume payments even if you wanted to. You may need the co-signer to create a will to specify that the account goes to you in case of death of the co-signer. You could create a "joint tenancy," which creates a partnership where both owners receive equal equity in an undivided property. If a partner dies in a joint tenancy, ownership goes to the survivor.
Tip
Talk to your bank about what happens when the co-signer dies. Also, you may need a copy of the deceased's death certificate before the bank proceeds with any cancellation. If you want to set up an estate or create a partnership, consult a lawyer. Check your state's law for co-signer rights, such as protection from lawsuits in case of death.
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