Summary: The economy is hitting car dealerships hard across North America, and some are going out of business. If a dealership goes out of business, you might be handed a surprise bill on your trade-in. Yes, the bank can go after you for any liens outstanding on unsold trade-ins prior to clearing the liens. Here is an overview of the problem, and six tactics you can’t afford to ignore to protect yourself.
To cope with the current credit crunch, many people have extended their car payments over six or seven years. This means that many new car buyers trade in their old vehicles with unpaid liens against them. Car buyers find this an incredibly attractive deal.
Dealerships simply include the outstanding debt on the new vehicle purchase and calculate new monthly payments. This is a win-win deal for both the car buyer and the dealership; you get a new vehicle sooner and the dealership simplifies its sales process.
Paying off outstanding debt on a trade-in has never been an issue in the past. But enter the credit crunch, as well as the recession and suddenly cash flow is a priority for all businesses - including car dealerships. Some dealers might not be clearing outstanding trade-in debts as fast as they used to. All is fine … as long as the dealership doesn’t go bankrupt.
So what happens to these unpaid liens if the dealership goes bankrupt before clearing them you ask?
Customers are still legally bound to make payments on their trade-ins even if the dealer has possession of it! As a result customers are now responsible for making payments on not just their new vehicle but also their trade-in, even if they do not have access to the vehicle.
Thankfully, there are many laws, regulations and agencies set-up to protect consumers from these sorts of things.
For example in Ontario there is The Motor Vehicle Dealers Compensation Fund (MVDCF), which is a consumer protection fund created and supported by the registered car dealers in Ontario. The compensation fund protects consumers from unforeseen problems arising from, and directly related to, such circumstances as: dealer bankruptcies, unpaid claims resulting from a court decision, or a dealer's conviction of a criminal offence.
There are also many federal and provincial laws, like The Sales of Goods Act, the Consumer Protection Act, the Business Practices Act, and the Fair Trading Act (depending on which province you are in) that will help protect consumers.
In order to avoid any complications here are 6 solid tactics you can use to reduce the risk of a surprise lien.
The best thing you can do to protect yourself is never trade in a vehicle you still owe money on. Including additional debt on top of the new vehicle price is usually not a good strategy. Unless you need to change vehicles for a very good reason, it is always best to wait till you can afford to pay the outstanding debt yourself or wait till your payments are complete before trading it in for a new one.
If you want to avoid a surprise lien altogether deal only with reputable dealerships and/or high-volume dealerships that are part of a larger auto group. These dealerships will have increased security and will be less likely to go bankrupt.
If you are going to opt for the trade-in option where a dealership pays off your outstanding car loan, be sure of the financial health of the dealership before trading your vehicle in. If the dealership closes before they sell your car you may still be held responsible for the outstanding debt, on top of the car loan agreed to on your new vehicle purchase.
Used car buyers should also insist on seeing a vehicle's title. If buying from a private seller ensure their name is on the title. If you are buying from a dealership make sure the dealerships name, not the previous owner is on the title. If there is a lien on the car make sure there is a lien release attached to the title.
Whether you are buying from a dealership or a private seller you should check the Personal Property Registry for your province or territory to ensure there are not any outstanding liens on the vehicle. If there is an outstanding lien, such as a car loan or a garage keeper’s lien for unpaid garage bills, you could be responsible for the lien unless you can prove that a thorough check was conducted and nothing was uncovered. For a list of US and Canadian agencies for more information on Personal Property Registries see The International Association of Commercial Administrators.
If you end up buying a used car with a lien on it, you will have to pay the outstanding amount owing, if the previous owner doesn’t. If you fail to do so your vehicle may be seized. For private sales in Ontario, the seller should provide you with a Used Vehicle Information Package that shows ownership as well as liens on the car and the financial institution that has that lien. If the UVIP is not provided, go to the local licence bureau and request this info before buying the car to ensure there is not a lien on the car. For more information by province/territory see the links below.
