Although the person is dead, the loan may live on for years…or until it’s paid off. In some instances, death cancels the loan but this is rare. In some states, the next of kin doesn’t just inherit the estate. He inherits the debt as well and is required to pay the debt.
If someone cosigned the loan with the deceased, that person is responsible for the debt. Some loans, such as federal student loans, contain a clause that cancels the loan in the event of the death of the person who signed it.
Private lenders vary on their policies so heirs will have to check the note carefully to find out whether their liable for the debt.
If the loan has been secured with real property, it must always be repaid. Either the bank will repossess the property to cover payment or whoever has inherited that real property will have to pay off the note.
Sometimes banks or other financial institutions will give the cosigner or other family member a few months to decide how to pay off the loan so it’s important to speak with a financial officer quickly so a solution can be discussed.
If the original borrower purchased credit life insurance which pays off the loan in the event of death, there is no problem. The heirs get to keep their inherited property and the loan is paid.
Be sure you know the terms of any loan you take out and what the impact of this loan may be on your heirs if you die before it’s been paid off. Otherwise, you may be leaving your heirs with an unwelcome inheritance – a debt.