What Happens To Loans Taken By Deceased With Co-Applicant?

When a loan is taken jointly by a deceased borrower and a co-applicant, the liability for repayment does not end with the borrower’s death. The co-applicant, who is legally considered a joint borrower, remains responsible for the outstanding loan amount. The process of settling such loans involves certain legal procedures that determine the repayment and liability under Indian law.

Key Points Regarding Loans Taken With a Co-Applicant:

Co-Applicant’s Liability:

If the primary borrower passes away, the co-applicant (or joint borrower) continues to be liable for repaying the loan. The loan agreement typically stipulates that both the borrower and co-applicant are jointly liable for repayment.

This means that the co-applicant is legally responsible for repaying the entire outstanding amount of the loan, even after the death of the primary borrower.

Responsibility of Co-Applicant After Death:

After the death of the primary borrower, the co-applicant must ensure that the loan payments continue, either from their own income or through the deceased’s estate if applicable.

If the loan was secured by mortgage or any collateral, the co-applicant may need to continue making payments to avoid foreclosure or loss of property.

Co-Applicant’s Rights to Inheritance:

In case of the primary borrower’s death, the deceased’s estate (which may include property, bank balances, etc.) can be used to settle the loan. However, the co-applicant will still remain responsible for ensuring the repayment.

If the deceased’s estate is insufficient to clear the loan, the co-applicant must repay the remaining amount from their own resources.

Loan Settlement from Deceased’s Estate:

The estate of the deceased is responsible for clearing the liabilities (including the loan) as part of the succession process.

If the loan is a secured loan (e.g., home loan), the lender may choose to sell the collateral (e.g., property) to recover the loan. If the loan is unsecured, the co-applicant may have to negotiate with the lender for a settlement.

Co-Applicant as Guarantor:

In some cases, the co-applicant may also be considered a guarantor for the loan, especially if the loan agreement includes specific terms regarding guarantee. This means that the co-applicant could be called upon to settle the entire outstanding amount if the deceased’s estate cannot cover the dues.

The co-applicant may approach the lender to request an extension of time or restructuring of the loan if they are unable to pay the dues immediately.

What Happens If Co-Applicant Cannot Repay?

If the co-applicant is unable to repay the loan, the lender may take legal action for the recovery of the amount. This could involve filing a lawsuit, attaching assets, or even auctioning property that was pledged as collateral.

The lender can also approach the legal heirs of the deceased for repayment if the estate is not sufficient to clear the debt.

Insurance on Loans:

If the loan was taken with a loan protection insurance or term life insurance on the borrower, the insurance policy may pay out the loan amount upon the death of the borrower. The co-applicant should check if such insurance exists and whether it covers the outstanding loan balance.

Example:

If Mr. Sharma and his wife jointly took a home loan, and Mr. Sharma passes away, the wife, as the co-applicant, will be responsible for continuing the payments on the loan. If she cannot pay, the bank may sell the property to recover the loan amount, unless there is insurance that covers the outstanding balance. If the estate of Mr. Sharma is sufficient, it may be used to settle the remaining loan.

Important Considerations:

Joint Liability:

The most important aspect of joint loans is the joint liability of both applicants, meaning the co-applicant remains equally responsible for the debt.

Debt Recovery:

In case of non-payment, the bank or lender can initiate legal action for the recovery of the debt, which may include foreclosing property or seizing assets.

Insurance:

Some loans are covered by loan protection insurance, which could help repay the loan amount in case of death, so it’s important to verify the existence of such a policy.

Communication with the Lender:

It’s crucial for the co-applicant to inform the lender of the borrower’s death and negotiate repayment terms, especially if the co-applicant faces financial difficulty.

Conclusion:

When a loan is taken jointly by a deceased borrower and a co-applicant, the co-applicant remains legally responsible for repaying the outstanding amount. The lender can pursue the co-applicant for repayment and may even recover the amount from the deceased’s estate. The presence of loan protection insurance or other clauses can ease this process. It is essential to understand the loan terms and consult with the lender or legal professionals to ensure proper settlement of the outstanding debt.