Dear Penny: My Mom Signed Our Truck Loan. What Happens if She Dies?

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Dear Penny,

We have terrible credit. My mom financed our truck. My husband was supposed to be put on the loan as a co-signer but wasn't. 

My mom is older and now has serious health conditions. She is concerned about what happens to the truck if she passes. We can't currently refinance the loan in our name. What would happen if she did pass? We have made all the payments. The registration and plates are in our name. Her name alone is on the loan.

-T.

Dear T.,

Practically speaking, it’s unlikely that the lender would repossess the truck as long as someone is making the payments. So if your mother dies with the loan outstanding, I’d continue making payments while her affairs are sorted out in probate.

Right now, your mother is legally on the hook for the loan even though you own the car and make the payments. Should she die with the loan outstanding, the only thing that would change is that her estate would be responsible for the loan. Though probate laws vary by state, typically an estate’s executor is required to notify creditors of someone’s death so they can file a claim. 

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If your mother expects to die with more assets than debt, she could include a provision in her will to pay off the loan. Otherwise, the lender probably has a process for how all this works that’s buried in the loan paperwork your mother signed. It’s called a death clause, and it spells out what the lender will do to make sure it gets paid if the borrower dies. Because this situation is somewhat unusual — your mother has the loan, but you own the car — it may be worth calling the lender for clarification. 

Unfortunately, the lender may say that refinancing would be the only option. Lenders typically won’t just transfer a loan to another borrower who can’t qualify based on their own income and credit.

While you say you can’t refinance the car in your names, perhaps you could refinance it now with one of you and your mother. Of course, the downside to that is that you may wind up paying more due to rising interest rates. But if you could get one of your names on the loan, that person would become the primary borrower if your mom dies.

You could also work on your credit now so that you can refinance later on if necessary. Since you have “awful” credit, you each could start by opening a secured credit card. You can often see substantial improvements in six months to a year. Even if you don’t have good credit, the lender may be willing to refinance the loan in your names if the car is worth significantly more than the balance.

Another possibility would be to ask a different family member with good credit if they’d be willing to co-sign if you refinanced the loan. Normally, I’m hesitant to recommend that anyone agree to co-sign because of the potential damage to their credit. But you’ve made all the payments, so if you’re confident you can keep making them, it’s worth asking.

Hopefully, none of this will be necessary. But it’s smart to have a plan for the worst-case scenario of your mother’s death. Start working on your credit now, and above all, keep making those timely payments.

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Robin Hartill is a certified financial planner and a senior writer at The Penny Hoarder. Send your tricky money questions to [email protected].