Car Loan Death Clause: What You Need to Know | Cake Blog (2022)

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Think back to your last car purchase. What were you thinking about? You probably focused on how shiny it was or the practical value the new car would add to your workday or leisure time.

But have you thought about what you’d do if the unthinkable happens? People do die with car loans in effect, so it’s important to understand what happens in this context.

Car loan liability may become a concern if you or a loved one dies with car loan debt — it usually comes to a head as the estate settles. There are contexts in which the car loan may pass to someone else, but more often, the car loan will be settled out of your estate or it will go unpaid. If the loan goes unpaid, At this point, the car loan lender may take a loss or repossess the car.

Jump ahead to these sections:

  • What Happens to the Car Loan When the Owner Dies?
  • How to Assume a Car Loan After Someone’s Death
  • What if You Can’t Afford to Take Over the Loan?
  • Understand the Car Loan Death Clause Variation

Once you become the heir of a person with a car loan, you’ll need to make decisions based on what you wish to happen to the car — and the debt.

You’ll need to keep a few considerations top of mind when you make your estate planning checklist. You can help ease the car loan transition for your beneficiaries if you think about what will happen when you die.

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What Happens to the Car Loan When the Owner Dies?

Car Loan Death Clause: What You Need to Know | Cake Blog (1)

Your estate includes all the assets you own (that are not held in trust) and any outstanding debts when you die. The estate is responsible for paying your debts if the total assets are greater than the total debts. Anything that remains goes to the designated beneficiaries through a court process called probate.

Probate is the court process that handles giving your assets to your beneficiaries. Probate involves legal fees — and there are a variety of ways that people avoid having assets and debts go through probate. You can set up trusts and create direct beneficiaries or “payable on death” accounts, depending on the asset.

Your loans are still active when you die, and the lender still will work to receive payment. The estate, however, is the primary “responsible party,” since your assets in life are the first place where the lender should go to get paid.

Let’s say the assets in the estate don’t pay for the car. The car is still an asset itself and may have been bequeathed to someone in the will. This is a double-edged sword — the beneficiary who receives the car may not have the money to keep up the payments on the loan.

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Cosigners on car loans become responsible for the car loan after the death of their fellow cosigner. The same is true for situations where two people buy a car together. When one dies, the other becomes the sole owner by default — without going through the probate process.

For the sake of making this easier to understand, let’s assume that you are in a position to assume a car loan after a person’s death. Potential complications could show up along the way. This is especially true if there is anything unusual in the purchase or loan agreement.

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How to Assume a Car Loan After Someone’s Death

Car Loan Death Clause: What You Need to Know | Cake Blog (2)

There are several ways to assume a car loan after a loved one’s death, whether you’re the spouse or a family member. Here’s how to do it.

Step 1: Send a death certificate to the lender

Lenders need to know about the death of the car owner as soon as possible. Sending the death certificate may trigger the lender to send you specific loan paperwork. Each lender handles this differently.

The executor or administrator of the estate should have multiple copies of the death certificate and the certificate can help begin positive communication between the estate and the lender.

» MORE: A will is not enough. Get all the documents you need.

Step 2: Keep making payments

One of the best ways to avoid issues with a car loan after death is to make sure someone continues making payments on time.

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Friends and family members who want to be helpful during this time might be able to extend a hand by putting together some payment reminders. They can also help you through phone calls and any paperwork that lenders send you.

Most car loans are secured, which means the lender might attempt to repossess the car if you’re not making payments on it. Continue to make payments so you don’t default on the loan and trigger a potential repossession. Your ultimate goal might be to sell the car, but no matter what, it’s best to avoid repossession.

To be clear here, the estate (by way of the executor or administrator of the estate) is responsible for making the car payments while the probate process is ongoing. The beneficiary (the one ultimately receiving the car) should not make any payments until the estate has officially transferred the car to the beneficiary.

While probate is pending, the estate may decide to sell the car to pay other debts - you as the beneficiary don’t want to find out you’ve been making the monthly payments on a car you’ll never receive.

Clear communication between the executor or administrator and the beneficiary is essential to avoiding confusion and making sure the payments are made properly.

Step 3: Verify credit life insurance or the estate’s ability to pay down the loan

You may learn more about your deceased loved one’s overall financial picture as the estate settles. The owner of the car may have purchased credit life insurance on the car loan.

This insurance offers a death benefit that helps pay off a car loan when someone dies. If you find out there was credit life insurance on the car loan, tell the administrator or executor of the estate right away.

Another possibility is that the car loan could be paid out of the estate. As you might recall, estates include all the assets and all the debts someone has at the point of death.

If the estate contains more assets than debts, it’s possible to use some of the liquid assets (readily available money) to pay off the car loan. This will depend on the provisions of the will, if any, and decisions by the executor or administrator of the estate.

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Step 4: Refinance the loan if necessary

Sometimes the estate may not be enough to pay all debts, including the car loan. You may want to refinance for more favorable terms before you assume full responsibility for the loan. This may include an entirely new loan, but knowing what your options are may help you to afford the new monthly payments.

What if You Can’t Afford to Take Over the Loan?

You may still find yourself liable if you’re a spouse or cosigner and you cannot afford to take over the loan. The lender is likely to repossess the car in order to resell it and recoup its losses on the loan if you fail to pay. The main reason you may not be eager to do this is that your credit could suffer, particularly if you’re a cosigner.

You might also want to avoid it because you might be able to make back some of the previous owner’s investment in the car by selling the car yourself. If the lender sells it at auction for less than it’s worth, you could end up with nothing.

You’re off the hook if you can’t afford the loan and aren’t liable for the loan. Non-spouse family members and other beneficiaries of the estate who aren’t cosigners on the loan cannot be forced to assume the loan.

In that case, the estate may decide to sell the car to pay off the car loan. Depending on your state and other provisions of the will, you may be entitled to any extra proceeds from the sale of the car after paying off the car loan.

It may be a good idea to talk with every heir and make sure that they aren’t interested; just because it would be too much of a liability for you doesn’t mean that there isn’t someone in the family who could use it and could assume the payments.

Lenders may be rather persistent, so it’s important to know your rights. Lenders may make contact when you have no interest in assuming responsibility for the car loan.

Just direct the lenders to the administrator or executor of the estate and request not to be contacted again — be sure you know your rights under the Fair Debt Collection Practices Act (FDCPA). The company may take steps to repossess the car but they aren’t allowed to indefinitely call you if you’ve asked for the calls to stop.

Post-planning tip: If you are the executor for a deceased loved one, handling their unfinished business can be overwhelming without a way to organize your process. We have a post-loss checklistthat will help you ensure that your loved one's family, estate, and other affairs are taken care of.

Understand the Car Loan Death Clause Variation

Each car loan is a little different, and the decision really depends on the situation. If your loved one bought a car a few months ago and has basically just driven it off the lot, the payments may be too high to justify the value the heirs can get from it.

On the other hand, even a high payment may be worth considering if the car loan is only a few months from being paid off. Not all car loans are created equal, and there is a good chance that the context will determine which choices you make.

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That being said, you won’t be able to keep the car and avoid paying off the car loan at the same time. You’ll need to figure out which direction you want to go if you find yourself in that situation.

Think about this, too: Many cars have a lot of equity built up, so it might not be the best move to allow the lender to repossess the car.

The best path forward might be to allow someone in the family or beneficiaries of the estate to handle the payments and then sell it themselves.

Be sure to prep your own future beneficiaries for a car loan that may not be paid off when you die. It’s important to understand how loans will affect your descendants as you work on your estate planning. You can buy credit life insurance or designate some liquid funds to help your beneficiaries make the first few car payments.

Lastly, think carefully about whether you want to get a cosigner or co-owner on any car loan. That person should know how he or she would handle the entire burden of the car loan alone.

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FAQs

What happens if a person dies halfway through a car finance deal? ›

Your car finance debt does not disappear after you die

If you have a personal contract purchase (PCP), hire purchase (HP), personal loan or any other kind of borrowing to finance your car, that debt remains payable even in the event of your death.

What happens when primary borrower dies? ›

If the primary borrower dies without getting married or having children, their assets will typically go to their surviving parents (or to their siblings if their parents have also passed away). Keep in mind that the title of the car can't be transferred until probate is completed.

Can I sell deceased car before probate? ›

A motor vehicle is a chattel and you do not have to wait until a grant of probate or letters of administration have been issued to be able to transfer a car to another owner or to sell it.

What happens to car loan if borrower dies? ›

Death does not extinguish any debts or loan obligations. Unfortunately, it will remain until it is paid by the estate. Because of the rules on succession, both assets and liabilities will be passed on accordingly.

Do car loans have life insurance? ›

Credit life policies are not only available on car loans but for such purchases as furniture, appliances, and trucks. Variations include credit disability insurance and credit unemployment insurance. The former provides coverage that makes payments to the loan holder if you become sick or disabled.

What loans are forgiven at death? ›

Federal student loans are forgiven upon death. This also includes Parent PLUS Loans, which are forgiven if either the parent or the student dies. Private student loans, on the other hand, are not forgiven and have to be covered by the deceased's estate.

Does it matter whose name is first on a car loan? ›

It doesn't matter whose name should come first on a car loan; it's merely a formality. The only thing that truly matters is that both you and your wife can successfully apply for the loan.

How do you transfer ownership of a car if the owner is deceased? ›

As a car cannot be registered to someone who is deceased, so you need to tell the DVLA if you want to keep it or transfer it to a friend or family member. To transfer ownership of the car, fill in section 2 of the V5C (section 6 if you have the old-style V5C, which were issued up to 15 April 2019).

Can I sell my dead mums car? ›

Selling the vehicle

Send the V5C registration certificate to the DVLA Sensitive Casework Team. Include a letter explaining your relationship to the person who's died and date of death. You do not need to transfer the vehicle into your name, this would cause a delay waiting for the V5 to be returned from the DVLA.

What is the threshold for paying inheritance tax? ›

In the current tax year, 2022/23, no inheritance tax is due on the first £325,000 of an estate, with 40% normally being charged on any amount above that. However, what is charged will be less if you leave behind your home to your direct descendants, such as children or grandchildren.

What can you do before probate is granted? ›

Acts done before probate
  • pay or release a debt.
  • get in and receive the testator's estate.
  • assent to a legacy.
  • generally intermeddle with the testator's goods.
  • exercise commercial rent arrears recovery (formerly distrain for rent)
  • release an action.
  • make a conveyance or assignment of personalty.
8 Dec 2021

What debts are not forgiven at death? ›

As a rule, a person's debts do not go away when they die. Those debts are owed by and paid from the deceased person's estate. By law, family members do not usually have to pay the debts of a deceased relative from their own money. If there isn't enough money in the estate to cover the debt, it usually goes unpaid.

Do legal heirs have to pay if a borrower dies with loan outstanding? ›

The legal heir has the right to use the term insurance claim amount to repay the deceased's home loan and other liabilities. If there is no home loan insurance, the bank cannot recover the outstanding amount from the co-borrower, legal heir or guarantor. It can seize the property and liquidate it to recover the money.

Is wife liable for deceased husband's debt? ›

When someone dies with an unpaid debt, it's generally paid with the money or property left in the estate. If your spouse dies, you're generally not responsible for their debt, unless it's a shared debt, or you are responsible under state law.

How does life insurance on a car loan work? ›

Credit life insurance usually covers any remaining debt that a borrower has on a large loan. In a typical policy, the borrower will pay a premium — often rolled into their monthly loan payment — that allows the lender to be paid in full if the borrower dies before paying off the loan.

How long does it take for insurance to pay off car loan? ›

Most insurers will process a payment within 30 to 45 days of a claim being filed. Remember that gap insurance can only pay out after the rest of the claim is settled, because it fills in the gap between what you received for the damage and what you still owe on your loan or lease.

What is payment protection on a car loan? ›

A payment protection plan is an optional service offered by some credit card companies and lenders that lets a customer stop making minimum monthly payments on a loan or credit card balance during a period of involuntary unemployment or disability. It may also cancel the balance owed if the borrower dies.

Do children inherit debt? ›

Although a person's debt is usually not passed on to their spouse or children, there may be instances where it could happen. You must be prepared for all eventualities and understand how debt inheritance works. Here is a detailed guide to debt inheritance and what you can do to deal with it.

Do next of kin inherit debt? ›

Generally, the deceased person's estate is responsible for paying any unpaid debts. When a person dies, their assets pass to their estate. If there is no money or property left, then the debt generally will not be paid. Generally, no one else is required to pay the debts of someone who died.

Is family responsible for deceased debt? ›

Contrary to popular belief that a person's debt and financial obligations die with him or her, the Civil Code of the Philippines clarifies through Article 774 that settling of debt and other financial obligations left by the deceased is assumed by his or her successors.

Can a car loan be in a different name than the title? ›

Theoretically, yes the title can differ from the loan. Most common real life example is a husband and wife in the title but only husband on the loan. Parent and child too. However, most banks will want the title to match the loan, so they may require a change.

Can a primary borrower be removed from a car loan? ›

Can I remove a primary borrower? No, as the cosigner, you can't remove the primary borrower from the loan. Unfortunately, since you have no legal rights to the vehicle, the primary borrower has to take the initiative to remove someone's name from the contract.

How can you get out of a car loan contract? ›

5 options to get out of a loan you can't afford
  1. Renegotiate the loan. You can reach out to your lender and negotiate a new payment plan. ...
  2. Sell the vehicle. Another strategy is to sell the car. ...
  3. Voluntary repossession. ...
  4. Refinance your loan. ...
  5. Pay off the car loan.
29 May 2022

Can you change ownership of a vehicle online? ›

Doing it online is a bit easier and quicker. You'll still need your V5C logbook as you need the 11 digit reference number and the new keeper slip. All you need to do is go to the gov.uk website and fill out the form to transfer ownership, and a new logbook will be sent out to the new keeper.

Can I sell my late husband's car? ›

You will need your husband's death certificate also legal proof of your entitlement to sell the vehicle on behalf of your husband's Estate. This could be part of the will where you are named or on a Solicitor's letter showing your entitlement to deal with the proceeds of the Estate.

Do you need to inform the passport office of a death? ›

It is a simple document to complete. Just fill in the details of the person who has died and your details, as the person cancelling the passport. For security purposes, it is important you cut the top right hand corner off the passport before sending it to H M Passport Office for cancellation.

Does a contract terminate on death? ›

Generally, contracts of the dead survive to haunt the living; the executor or other successor must perform the decedent's remaining contractual duties. A major exception is that personal service obligations die at death.

What types of debt can be discharged upon death? ›

What debt is forgiven when you die? Most debts have to be paid through your estate in the event of death. However, federal student loan debts and some private student loan debts may be forgiven if the primary borrower dies.

Do I have to pay credit card debt of deceased? ›

Generally, the deceased person's estate is responsible for paying any unpaid debts. When a person dies, their assets pass to their estate. If there is no money or property left, then the debt generally will not be paid. Generally, no one else is required to pay the debts of someone who died.

What does optional final payment mean car finance? ›

The Guaranteed Future Value (sometimes known as the Guaranteed Minimum Future Value, optional final payment or balloon payment) is when a finance company guarantees what your car will be worth at the end of your finance term, regardless of its true depreciation.

What is a death clause? ›

A death and disability clause allows a tenant to step away from their commercial lease, even if the lease's terms are not up, if the main practitioner dies or becomes disabled and cannot work. This is a common clause considered for medical and dental practices that have one lead provider.

What makes a contract null and void? ›

A contract may be deemed void if the agreement is not enforceable as it was originally written. In such instances, void contracts (also referred to as "void agreements"), involve agreements that are either illegal in nature or in violation of fairness or public policy.

What happens when someone dies after signing a contract? ›

Practically, this requires a Notice of Death to be lodged with NSW Land Registry Services for the transfer of ownership. Details of the evidence of death will need to be provided and this is commonly found on the death certificate. A death certificate may be issued a few weeks after death.

What debts are not forgiven at death? ›

As a rule, a person's debts do not go away when they die. Those debts are owed by and paid from the deceased person's estate. By law, family members do not usually have to pay the debts of a deceased relative from their own money. If there isn't enough money in the estate to cover the debt, it usually goes unpaid.

What loans are forgiven at death? ›

Federal student loans are forgiven upon death. This also includes Parent PLUS Loans, which are forgiven if either the parent or the student dies. Private student loans, on the other hand, are not forgiven and have to be covered by the deceased's estate.

Can the IRS come after me for my parents debt? ›

If your parents were to pass away and if they happened to owe money to the government, the responsibility to pay up would fall right onto your shoulders. You read that right- the IRS can and will come after you for the debts of your parents.

Can you use a deceased person's bank account to pay for their funeral? ›

Many banks have arrangements in place to help pay for funeral expenses from the deceased person's account (you should contact the bank to find out more). You may also need to get access for living expenses, at least until a social welfare payment is awarded.

When a person dies does Social Security take back money? ›

For example, if a recipient dies on June 24, the payment made on July 3 will have to be returned. Consequently, in most cases the estates of decedents must pay back the Social Security Administration (SSA) for the last payment received.

Does Social Security Report death to credit bureaus? ›

The creditors often find out directly through a surviving family member. The second source is the Social Security Administration (SSA), which routinely sends out a list of newly deceased individuals to the three major credit bureaus: Experian, TransUnion, and Equifax.

What is a balloon payment car? ›

A balloon payment on a car is a final, lump sum paid at the end of a loan's term that is larger than the payments that came before it. An auto balloon loan might be a good fit for those looking for lower monthly payments similar to a car lease but with the rights of ownership.

How do you beat balloon payment? ›

You can handle a balloon payment in a variety of ways.
  1. - Refinance: When the balloon payment is due, one way to pay it off is to obtain another loan. ...
  2. - Sell the asset: Another way to deal with the repayment is to sell off the asset your purchased with the loan.
12 Nov 2020

What happens if my car is worth more than the balloon payment? ›

When your car is worth more than the balloon payment. If your car is worth more than the balloon payment at the end of the contract, then paying this could leave you better-off in the long run, even if you don't want to keep the car. You could sell the car immediately, leaving you with a surplus amount.

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