I cosigned a motorcycle loan and the owner passed away: What are my obligations to the bank?

What to know about cosigning a loan

Anytime you co-sign for a loan, you’re automatically entering into a financial obligation as if it was your own. 

In your case, depending on how the loan was structured, as the co-signer, you may or may not have the title to (legal ownership of) the motorcycle. You will need to check with your creditor to determine your level of responsibility.

As the other party to the loan has passed away, the lender will likely contact both you and the estate representative to make arrangements to ensure that loan payments continue to be made, as you are equally 100% responsible for the loan. 

As a result, I recommend that you work with the estate representative to discuss how they would like to proceed in paying out the debt as part of their responsibilities in settling the estate. 

Check in with the creditor 

When figuring out your obligations as co-signer, check in with the financial institution that issued the loan.

I took the time to contact a financial institution to see how they might handle a situation like yours. They told me that, from their point of view, a co-debtor is 100% responsible for the debt—the same as the other applicant. 

They also said they would ask a financially established survivor to continue making payments on the loan contract. If the survivor is financially unstable, however, the lender said they might ask the estate representative to pay the debt from estate assets, which could mean selling the motorcycle that the lender may hold as collateral. 

Understand your options

First of all, don’t panic! When someone dies with outstanding debt, most creditors are understanding and will work with the estate and co-borrower to ensure the loan is paid. 

Don’t assume you have to start paying the loan immediately, but inquire directly with the lender to see if arrangements have been made to pay off the loan. The executor of the estate may have made arrangements to retire the loan with the creditor through selling the motorcycle and using the proceeds to pay off the loan. It is also possible that the borrower purchased creditor life insurance that will pay out the loan.

If the estate is not able to pay off the loan, the creditor will contact you to arrange for the loan payment. As a co-signer, you have an obligation to repay the loan based on the loan contract. You also have a right to review the loan contract terms at any time. 

With all the implications above, it’s important to understand your obligations before you decide to co-sign on a loan. Consider the following information before agreeing to cosign a loan.

Your obligations as a cosigner

• As a co-signer, the loan will be treated as if you were making your own personal loan application.  

• By acting as a co-signer, you are now responsible for the payments of the debt. Your own borrowing needs may also be limited, as the payment of the loan will fall under your direct liability as a debt obligation.  

• The loan will show up on Equifax and TransUnion credit reports, and any loan default (such as a missing payment) may harm your credit score. Late payments also harm your credit rating.  

Before co-signing on a loan, ask yourself the following questions:

• How well do you know the borrower’s financial situation? They may have credit issues. For example, they may be starting a new job for which they haven’t yet received payment or they may have limited resources to pay for the loan. 

• If the lender doesn’t want to take on the risk of lending to this person, are you sure that you want to? Keep in mind that there is a reason the financial institution is asking for a co-signer in the first place.

• Do you have a plan to track that the payments are being made? If you agree to co-sign a loan, you have the right to request information from the creditor to ensure all payments are being made as per the loan contract. 

• In a worst case scenario, do you have the financial means to repay the loan in question? As a co-signer, you should make sure you have the financial capacity to repay the loan in case the borrower cannot meet the obligations in the loan agreement.

This response was provided by FPAC Member Sheldon Craig. He is a Certified Financial Planner and the owner of Craig Consulting, an independent fee-only financial planning service.

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