What Happens if a Cosigner Dies?

A cosigner on a loan accepts as much responsibility as any other parties to the loan. Often, a cosigner is required when a borrower's credit does not meet traditional lending standards. In the event that the borrower defaults on a loan, the cosigner assumes all repayment responsibilities and negative credit impact until the borrower or cosigner pays the balance of the loan or brings it up to date. If the cosigner dies, however, the rules of the game may change.

Promissory Note

The promissory note outlines the disposition of the loan, falling under state and federal banking laws depending on the type of loan it is. Some types of loans will automatically default all payment responsibilities to the primary borrower upon death of the cosigner, while others require a buyer to refinance a note on his own if the cosigner passes away. This varies from one state to the next.

Position on the Note

The position the cosigner holds on the note also plays a big part in how repayments are structured. For instance, if a cosigner is actually a primary on a mortgage, holding a verbal or written agreement with the borrower to pay the note regularly, and the cosigner dies, the borrower must refinance the entire mortgage into his name. However, if the cosigner is in a secondary position on the mortgage, in many states the mortgage repayment responsibilities default to the primary borrower without any paperwork required. In this case, any ownership interest the cosigner had to the property defaults to the primary borrower or to whomever the cosigner names in his will regarding property interests and holdings.

Community Property States

In the event that the cosigner to a note is married and lives in a community property state, all of his debt and property holdings automatically transfer to his spouse upon death, including cosigned loans. In this case, the spouse would assume repayment responsibilities on the loan if the primary borrower defaults. In some states, loan paperwork requires addenda modifying the original terms of the loan for this, while in others, a simple notice to the cosigner from the lending institution will suffice. This holds true in every community property state, regardless of whether or not the spouse was on the original loan.

Defaulted Loans

If a loan is in default when the cosigner passes away, the lender retains the right to hold the cosigner's estate accountable for repayment, if he is unmarried or does not live in a community property state. In this case, the balance of the loan puts property and assets in probate (holding) until the loan is satisfied. In these cases, it is wise for survivors to the estate to consult with a legal professional on how to dispose of the debt, using the promissory note as a guide.