What Happens to a Bank Loan if the Person Dies?

Although death is the end of a person's life, his debts may live on for years. Sometimes a death cancels the loan. Much of what happens to loans after death depends on what type of loan you have and if anyone else claimed legal responsibility for the debt during your lifetime. In some states, the next of kin have no choice but to pay the debt.

Cosigners

Anyone who co-signed the loan must repay the debt upon your death. Some loans may have provisions that cancel the loan in the event of your death. Most federal students loans carry this clause. Private lenders vary on what they will do in case of death, so you must review your promissory note for happens.

Secured Bank Loan

When a bank has a loan secured with real property, it must receive repayment no matter what. Normally, the secured property goes to the next of kin who will accept the property. In case the deceased has no kin willing to accept the property, the bank can repossess the property. If the property does not pay off the debt, the bank can sue the estate for repayment of a deficiency, but many banks take the loss rather than receive bad publicity from suing a family during a time of grieving.

Considerations

In the event of an unsecured debt, the creditor has no choice but to petition the estate for repayment if the debtor left any assets. If the debtor was insolvent -- unable to pay back his debt because his liabilities exceed his assets -- the creditor can no longer collect on the debt. In community property states, both spouses have a duty to repay debts incurred during marriage. Thus, if one spouse dies, the other assumes the loan.

Tip

When a loved one dies, someone needs to provide the bank a copy of the death certificate. He also needs to ask the bank about what happens with the loan. If someone co-signed on it, the bank may offer a forbearance or deferment for a few months to help the co-signer assume the loan -- assuming that death does not cancel the loan. The original borrower may have purchased credit life insurance, which pays for the loan and lets the heirs keep the property.