If your credit or income isn't sufficient enough to qualify for a loan on your own, a co-signer can be the solution. The co-signer vouches for you and promises to repay the debt if you can't. If your co-signer passes away, you no longer have anyone to stand behind you. Lenders generally take precautions by including protection clauses in the loan agreements. These clauses indicate what happens if your co-signer dies.
If a loan co-signer dies and the loan has a successor clause, his estate is liable for paying the balance of the loan if the other borrower defaults. And if the loan has an automatic default clause, the lender has the right to call the full amount of the loan balance due upon the death of the co-signer.
Co-Signer Successor Clause
If the contract or agreement contains a successor clause, the co-signer's estate becomes liable for the debt in the event of his death. The estate won't have any payment obligation, provided the borrower is paying the debt as agreed. If the borrower defaults, the lender can seek payment from the estate during probate. However, if all the assets are exempt from probate, they'll automatically pass to the beneficiaries. The co-signer's beneficiaries can't be held liable for the debt. If the clause isn't present, the co-signer's responsibility ends at death.
Automatic Default Clause
The automatic or auto default clause can impact the borrower directly if the co-signer dies. Such a clause gives the lender the right to demand full repayment immediately upon the death of a co-signer. Even if you were in good standing before the co-signer's death, the lender can declare the loan in default if you don't pay the entire balance.
You can attempt to negotiate a payment agreement with the lender to avoid the automatic default, but the lender isn't obligated to work with you if the clause is present.
Cosigner Release Clause
A co-signer release clause gives the you the ability to remove the co-signer once you're able to qualify for the loan on your own. Generally, it'll only require a credit check and proof of income. If there's no co-signer release clause, you'll need to refinance the loan solely in your name, or find another co-signer. Once you refinance, the new loan will replace the existing loan. If there's no successor clause or automatic default clause, you don't necessarily have to remove your co-signer from the loan if she dies. You can't be forced to have a co-signer, and the agreement can't be cancelled or revoked unless stated in the paperwork.
- FindLaw: If a Student Loan Co-signer Dies, What Happens?
- Consumer Financial Protection Bureau: CFPB Finds Private Student Loan Borrowers Face “Auto-Default” When Co-Signer Dies or Goes Bankrupt
- Boston Student Loan Lawyer: Co-Signer Release: Why You Should Consider It
- Experian. "7 Things Lenders Look at Besides Your Credit Score." Accessed June 5, 2020.
- Experian. "Debt-to-Income Ratio." Accessed June 5, 2020.
- Experian. "What Is a Rapid Rescore? Is It Something I Should Consider?" Accessed June 5, 2020.
- Experian. "What Is Peer-to-Peer Lending?" Accessed June 5, 2020.
- First Alliance Credit Union. "The Basics for Needing a Cosigner on a Loan." Accessed June 5, 2020.
- Federal Student Aid. "Federal Student Loans: Basics for Students," Pages 2-3. Accessed June 5, 2020.
- GovLoans.gov. "Stafford Loans for Students." Accessed June 5, 2020.
- Wells Fargo. "Cosign a Private Student Loan." Accessed June 5, 2020.
Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies from the University of Central Florida.