What happens if your co-signer dies?

Question

If I have a co-signer on a loan, and she passes away, what happens? I obviously don’t have a co-signer anymore. But I wonder if the will bank go after her estate for the balance if I should default.

Answer

Co-signing a loan is not a step you should take lightly, because even in death you’ll be liable for the loan.

I checked with a number of the big banks and the answers were all the same: If the co-signer were to die, the estate would take the place of the deceased person on the loan. There would continue to be two borrowers liable for the account—one living and one deceased.

This is usually outlined in the loan agreement, says Dawn Deans, an estate lawyer with the 2020 Law Group. “There is often a ‘successor clause’ that binds you and your estate to repay the debt. If that clause is not in the agreement than the co-signer’s obligation could end in their death.”

As long as the living borrower continues to make payments on-time and there is no default on the loan, nothing would change. But in the event of a default the bank would have the right to pursue both the living borrower and the estate equally. The estate would need to pay all debts before distributing funds to the beneficiaries named in the will.

The executor should place a “notice to creditors” in the newspaper informing anyone who has an outstanding loan of the person’s death, says Deans. Once the notice period has past the executor can be distributed the estate without liability.

If there isn’t enough money in the estate for whatever reason, it is unlikely that the surviving family members would be liable. Generally speaking only a person who has signed on the dotted line to repay a loan is legally responsible for the loan. But it is worth consulting an estate lawyer on that question. Circumstances and place of resident can lead to different outcome, in part because regulations can differ from province to province.

In an earlier post I looked at questions to ask your parents regarding their affairs. I didn’t address co-signing loans in particular, but the topic is important to include.

Consider this scenario: There are two siblings, a son and daughter, and one surviving parent. Unbeknownst to the daughter, the mother co-signs a big loan for the son who has been having serious financial problems. She then dies suddenly and soon after the son stops making payments on the debt. The will spells out dollar amounts for the two siblings and for various charities, but the bank has called in its loan and now there isn’t enough money in the estate to execute the will according to her wishes. No one is happy with that outcome.

My point is that you need to think very, very carefully before you choose to co-sign a loan. There are financial implications, to be sure. But there is also a significant risk to the health of the relationships with those you love.

About Bruce Sellery

Bruce Sellery is the CEO of Credit Canada, the country’s longest-standing non-profit credit counselling agency. He is a former MoneySense columnist.