What happens when the co-signer of a loan dies?

[Stephen Tashiro]

I have no experience with co-signing loans and no prospect of any experience. However, out of idle curiosity, what happens when the co-signer of a loan dies? My impression of the term "co-signer" is that the co-signer is a sort of back-up for the signer of the loan and that if the signer defaults then the co-signer must assume the liability. But someone might die after co-signing a loan and a default by the signer might occur years afterwards.

[Joe Pelonio]

That is normally covered by the small print in the loan document. It may require that the borrower find a new co-signer or call the loan (demand payment in full) or it may require that the estate hold the amount required to pay off the loan until it has been satisfied, in which case the heirs may go to court to attempt to force calling the loan. There may even be language requiring that the estate pay off the loan in full upon the death of the co-signer.

[John Shuk]

My initial thought is that the co-signer's estate would have some responsibility if the actual borrower default's. I feel pretty confident that a lender would at the very least make that case.

[Stephen Tashiro]

It could be a big problem for the executor of a will to determine what loans the deceased person had co-signed. So the question of what happens when the co-signer of a loan dies involves certain practical aspects. For example, if the co-signer dies and the executor doesn't know about the co-signed loan, he wouldn't know to take any action to reserve funds from the estate to cover some future default. He wouldn't know to notify the lender that the co-signer had died. I'd think that, as a practical matter, lenders would often be faced with a situation where the co-signer died years ago, his estate was distributed to the four winds, the executor too may have died or moved out of state. So although they might have a legal claim to the dispersed assets, it would be impractical to recover them.

There are pages of newspapers covered with notices in small print that I rarely read. Some of them are announcements that anyone having claims against the estate of a certain person should come forward. I wonder if loan companies have people who read these announcements and cross reference the names to their list of co-signers.

[Joe Pelonio]

There are pages of newspapers covered with notices in small print that I rarely read. Some of them are announcements that anyone having claims against the estate of a certain person should come forward. I wonder if loan companies have people who read these announcements and cross reference the names to their list of co-signers.
I can tell you that a utility where I worked in CA had someone that did review those newspaper listings and would file claims with the estates for any outstanding water/sewer bills.