Released March 6, 2009
AUBURN UNIVERSITY, Ala. -- The upsurge of auto dealership closures has hurt and will continue to hurt thousands of people who are on the hook for used-car loans that dealers were supposed to absolve.
In a normal transaction when a car buyer still owes money on a vehicle trade, the dealer promises to pay off the outstanding loan, and then resells the vehicle. However, as more dealers go out of business, some are sticking consumers with having to pay off those outstanding car loans. Lenders can go after the previous owner who thought the debt was paid or repossess the car from the new owner who assumed it came with clear title.
This can be devastating for people because now they have two car payments instead of one. If a car buyer cannot make the payments, his or her credit can be blemished.
The problem may grow this year because of the deepening recession and continued trouble in the auto industry. About 25 percent of all car buyers are vulnerable because they still owe money on their trade-in or lease when they buy another vehicle, according to industry tracker Edmunds.com. It is common for drivers to owe money on trade-ins as people stretch their car payments over six or seven years to make them more affordable.
A few states have programs that require dealers to post substantial insurance bonds to repay victimized car buyers. Consumers in states with no such program, or a poorly funded one, have little recourse but to sue and hope for at least a small slice of the assets if the dealer has filed for bankruptcy. In Alabama a $10,000 surety bond is required for used car dealers, rebuilders, reconditioners and wholesalers. A $25,000 surety bond is required for all new car dealers.
Authorities have brought charges in rare cases where they have proof of intentional wrongdoing, but local prosecutors, motor vehicle departments and state attorneys general are paying more attention as the problem grows. This has become a serious problem because consumers, through no fault of their own, may be facing financial ruin because they purchased cars.
California is hit particularly hard because it has the nation's largest auto market, more dealers going out of business, and more buyers who owe money on their trade-ins.
Complaints are rising in Florida as well. Between March 1 and Sept. 1, 2008, Florida officials deemed valid 103 complaints regarding auto dealers' delinquent loan payments. By comparison, there were 37 confirmed complaints during the same period in 2007.
Data regarding auto loan defaults are not compiled nationally, but other states have similar problems, according to the National Automobile Dealers Association, National Consumer Law Center, prosecutors and private attorneys who are suing bankrupt dealerships.
It is difficult to help consumers who still owe money on trade-in vehicles when a dealer defaults. Some, for now, are advising consumers to hire attorneys and seek a share of the dealer's insurance bond. The problem is that once they've gone out of business, there's no money. Some states can suspend the dealer's license or refer the dealer to local prosecutors but cannot recover buyers' money.
More than 5,000 new and used car dealerships closed nationwide last year, according to industry groups. That includes 450 in California and that number is sure to rise in 2009.
"Unfortunately, with this economy, we can expect to see a growing number of dealers go out of business in the next year," said Iowa Assistant Attorney General Bill Brauch, who heads the National Association of Attorneys General auto working group. "I think there are going to be problems around the country with consumers having to eat significant costs."
Iowa, like California, requires dealers to post a $50,000 bond, but some states' bonds are as low as $5,000. Even $50,000 is often too little to cover defaults, Brauch said.
California lawmakers took an extra step by creating a Consumer Recovery Fund in 2007, with money coming from a $1 fee on each vehicle sold. Ohio, Virginia and West Virginia also have restitution funds, according to the National Consumer Law Center and the Ohio attorney general's office.
Bottom line, before you land in trouble, used-car buyers should insist on seeing a vehicle's title to make sure it has no liens. Buyers offering trade-ins should first pay off the loan themselves if possible, or deal only with high-volume dealers who are part of a larger auto group and are less likely to fold. Additionally, check out the dealer's financial health as best you can if you're going to let them handle your vehicle resale.
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Contact: Wil Golden, (334) 566-9386
