Why Warranties Will Be Covered Under an Automaker Bankruptcy

First of all, it’s important to note that nothing is certain if a car company files for Chapter 11. There is no law that says agreements with consumers must be honored first. In bankruptcy, the law is that no single creditor can get preference over others, and warranty costs are enormous; GM paid out $4.5 billion worth of warranty costs in 2007 and $3.9 billion over the first nine months of 2008.

Still, many experts and consumer advocacy groups are optimistic. After all, if an automaker wants to come out of Chapter 11 as a viable company, it has to maintain the confidence of its customers. Honoring warranties is a major part of that.

But won’t the hypothetical automakers’ other creditors object if they honor warranty debt first?

Again, not necessarily. It’s also in the interest of the other creditors (suppliers, for instance) for the automaker to survive and become a thriving company again.

In this regard, nothing is guaranteed, but consumers have reason to be optimistic.

Of Car Warranties and Chapter 11 (Wheels)