What if My Dealer, Automaker or Bank Goes Bankrupt?

As the credit crunch drags on, the future of some banks, car dealerships and even automakers has been called into question. If you're shopping for a car, talk of bankruptcy may worry you and could complicate your car shopping experience. You may also worry whether your new car's warranty will be any good, or even about the stability of your loan.

To help guide you through the storm, we talked to some experts to see how a dealer or manufacturer bankruptcy would affect your purchase.

What Happens to My Manufacturer Warranty?

According to Robert Lawless, a law professor at the University of Illinois, the law's answer is simple: Your warranty can be canceled.

Lawless is also quick, however, to note the practical realities.

"An automaker won't get very far if they can't make right on warranty," he said.

Because the main purpose of Chapter 11 bankruptcy is to let a company reorganize into something sustainable, automakers will likely do everything in their power to uphold warranties and keep their customers happy.

In fact, GM has said that its warranties are "safe and sound" for now and for the "next 100 years and beyond." As for Saab, a GM subsidiary that recently entered court-approved restructuring in its native Sweden, GM says warranties on new and certified pre-owned Saabs remain valid.

Isuzu, a Japanese automaker that stopped selling cars in the U.S. in 2009, has made arrangements with other dealers to honor warranties, according to the Detroit News.

"[In] almost every corporate case where warranties are involved, the warranties are recognized in Chapter 11 and made good," Lawless said.

Concerned that the threat of bankruptcy could make it harder for automakers to sell cars, the U.S. government has pledged to honor the warranties of Chrysler and GM vehicles, but only if the car was purchased during a set timeframe, starting March 31, 2009. How long these guarantees will last will depend on how the automakers fare in their attempts to remake themselves. If you are unsure whether your warranty is government-backed, check with your dealer.

If an automaker is unsuccessful in its Chapter 11 reorganization, its operations could cease and its assets could be liquidated, or sold off, in a Chapter 7 filing. In this scenario, your warranty could be canceled, leaving you without much recourse — unless your vehicle was purchased during the government's limited backing period.

What Happens to My Car's Resale Value?

If your car company goes bankrupt, you're probably going to see your car's resale value fall, said Mirko Mikelic, a portfolio manager for Fifth Third Asset Management. That's because many people will be unwilling to buy a vehicle from a failed automaker. Consumers would be rightly concerned about those vehicles' warranties and service centers after a bankruptcy. GM has stated that the recent suggestion of bankruptcy has stigmatized many of its brands in the eyes of consumers: According to CNW Marketing Research, about 30 percent of consumers who would have considered a GM vehicle avoided them due to the threat of bankruptcy.

According to the Chicago Tribune, residual values on Saturns, Hummers and Saabs have declined since GM said it might close or spin off those brands. Oldsmobile models lost a lot of their resale value after GM closed it down in April 2004, according to ALG.

To quell fears and boost sales, GM recently unveiled a policy that will effectively protect the resale value of your car for up to 72 months. The automaker will do so by making up the difference caused by poor resale value when you replace your car. The company will cover a maximum of $5,000 on a trade-in and $2,500 for a private sale if you've already made payments for at least half of the length of your loan.

Can I Still Get Parts for My Car?

Spare parts should be available even if your car company shuts down. That's because replacement parts can be refurbished or salvaged from older models, and new parts can be built by other companies.

A 1975 law called the Magnuson-Moss Warranty Act created a more competitive auto parts industry by allowing the use of unbranded, generic spare parts over "genuine" parts in warranty repairs.

Today, many manufacturers buy "genuine" replacement parts from the same subcontractors that make generic ones, according to the Insurance Information Institute. That means that even if your automaker goes out of business, it won't necessary affect the availability of parts for your car.

"If the cars are still out on the road, there will still be demand to build spare parts," Mikelic said.

What Happens if My Car is Recalled?

According to Consumer Reports, even defunct car companies would have to address safety recalls, but that may be hard to enforce when dealing with a shuttered, bankrupt automaker.

What Happens to a Loan Through a Dealer or Automaker?

According to Lawless, nothing about your loan would change.

"Bankruptcy concerns claims you have against the firm," like a warranty, "not claims the firm has against you," like loans, Lawless said.

Keep paying off your loan until it matures. One issue that could arise after a bankruptcy, however, is that your loan will likely be sold to a third party, and that lender may be less lenient about missed payments.

"The loan may come into the hands of a more aggressive creditor," Lawless said. "They could be more harsh in collecting the loan, but chances of that happening are pretty remote."

What Happens to My Loan Through a Bank or Credit Union?

Nothing would change with a credit union or bank loan. Under federal bankruptcy guidelines, Lawless said, neither banks nor credit unions can declare bankruptcy. Instead, they would fall into receivership, meaning the government would take control. You would simply abide by the terms of your loan agreement and continue to pay it off.

If My Financier Goes Bankrupt, Am I Off the Hook?

No. Nor would anyone reclaim your car, and nor should your financier call in the loan earlier than expected. Again, a third party would in all likelihood purchase your loan. Your obligations remain.

"Your promise to pay the loan is a promise to pay the lender," Lawless said. Even a contract with a bankrupt financier is binding.

By the same token, what a financier wants, even after bankruptcy, is its money back (plus interest), not the car.

© Cars.com 7/9/10
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