Auto dealers are going out of business and sticking car buyers with millions in unpaid loans. It’s happening all over the country. It’s not only corner car lots that are going belly-up. A softening auto market means manufacturers are shutting down unprofitable dealerships at an alarming rate. Even sizeable franchised auto dealerships that have been in business for years are not immune.
Thousands of consumers are becoming collateral damage when dealerships go belly-up.
Here’s how it happens. Your older truck, SUV or sedan starts to sputter. You get the bad news from your mechanic: it’s not worth fixing. It’s worth $4,000, tops. But you still owe the lender $6,000. In other words, in auto sales lingo, you are “upside down.” You owe more than the car’s retail value, leaving you with $2,000 in debt, or “negative equity.”
You go to a local auto dealership to buy another car. “Don’t worry,” the salesman says. “We’ll give you $6,000 for your wheels.” You think you are getting an unbelievable deal. But you’re not. Far from it. The dealer is only taking you for a ride. What they are really doing is simply adding the $2,000 you owe onto the price of your next car. So you are sinking even deeper into debt.
According to automotive experts who track vehicle trends, being “upside down” is an epidemic in America. In some states, approximately 40% of car buyers have negative equity when they purchase their next vehicle.
That’s bad enough, but what is going on now is even worse. Dealers promise to pay off the remaining balance of the loan when you trade in your car. You happily take the keys to your new vehicle, drive off the lot, and start making payments for the loan on your newer car.
Then a month or two later you get a call from your lender—the lender for the car you traded in.
“Where’s the last couple payments?” they ask.
“Didn’t the dealer pay off the loan?” you ask.
“What dealer?”
“Where I traded in that car.”
“We have no record of its being traded in. No one else is making the payments. You still owe us $6,000 for that car.”
“But I don’t have it anymore.”
“That’s too bad. We still have a contract. You still owe us $6,000 and we expect you to keep making the payments, or we’ll ruin your credit.”
You get back in touch with the dealer. Or try to. You drive to the car lot, and it’s vacant. The salesperson who sold you the vehicle is nowhere to be seen. Your vehicle is not there either. No one is in the office. The dealer has gone out of business. The DMV may be trying to locate the sales personnel, but they may have already set up shop in another state, outside your state’s jurisdiction, under another name. Or they may have fled the country.
In California, the problem has grown so serious that Governor Schwarzenegger signed legislation into law to create a new restitution fund for victims. When it kicks in, in the middle of 2008, the new law will require each auto dealer in California to chip in $1 per vehicle they sell, to compensate victims of dealerships that become insolvent and leave their customers holding the bag.
According to a legislative analysis of the bill, it was enacted in response to numerous dealerships that have gone belly-up in the past year, costing thousands of innocent victims millions. The analysis cites the following examples, noting that the names have not been provided, pending ongoing investigations by the District Attorneys in each county:
According to news reports, auto dealerships in the San Diego region also went out of business, leaving victims holding the bag, including members of the Armed Forces serving on active duty.
Sadly, this is far from a complete list.
How are dealers allowed to continue selling vehicles and taking vehicles in trade, even when they are insolvent? One culprit: lax oversight by state motor vehicle departments. Another factor: auto dealers in California, like most states, have to post only a measly $50,000 bond to get a dealer’s license. That is about enough to pay for two moderately priced cars. Before CARS spearheaded legislation to raise the dealer bond in California, for over a decade it had been a paltry $10,000.
Unfortunately, there is virtually no practical way for consumers to know whether a dealership is solvent, or not.
In some cases, consumers have had to file bankruptcy because they were suddenly stuck with two car payments, when—understandably--they had budgeted for only one.
What can you do to avoid becoming a victim of a dealership that is about to go belly-up?