Car Warranties and Resale Value After the Bailout

By Insurance.com Posted : 02/03/2009

With the economy continuing to slump and near-constant bad news about jobs and unemployment, it's no wonder that many companies are shutting their doors. Just before President Obama took office, the Bush administration authorized almost $20 billion in bailout money for GM and Chrysler. Although Ford continues to insist it does not yet need federal assistance, auto parts suppliers recently announced that they need around $15 billion to avoid bankruptcy. What happens to your investment in your car if the company that made it goes bankrupt?

What Bankruptcy Means to You
Under a Chapter 7 bankruptcy, a company is allowed to continue operating while trying to reorganize its business so it can pay off most of its debt. The main creditors for the company agree to take less money than they are immediately owed in exchange for input into how the company reorganizes to become profitable. Under this scenario, not much might change for consumers, at least initially, since the company is trying to continue operations.

However, there are a few potential problems with a car company declaring Chapter 7 bankruptcy. First, there's no guarantee that it won't have to file for Chapter 11 in the future. Circuit City filed for Chapter 7 bankruptcy last year and announced massive store closings and layoffs in an attempt to preserve a few stores and its online business. On January 16th, the company was forced to file Chapter 11 bankruptcy and end operations completely. When a company announces it's having serious financial problems, consumer confidence falters and sales drop. Companies that sell consumable or disposable goods don't share the same lack of trust as makers of so-called durable goods, because their products are only used once. If the company goes out of business, the products are not affected. On the other hand, if a car company goes out of business, the cars will be on the road for many years, but without a company to stand behind them.

Your Car's Resale Value May Plummet
It's been a long time since a carmaker went out of business, so it's hard to predict what would happen to the resale value of a used car or the price of a new car from a bankrupt company. However, most analysts agree that bankruptcy would almost certainly lower the value substantially. If a car company is forced to sell its assets to another company, the new owner may decide to revive the brand by shifting away from the cars it used to make. If that happens, prices for these cars will inevitably plunge, which is bad if you just bought one—but good if you're in the market for a bargain and don't mind a little uncertainty. From an insurance standpoint, your Comprehensive and Collision rates are partially based on vehicle replacement costs, so you might find your rates dropping in the future.

Honoring the Car Warranty
Although nothing is certain in bankruptcy proceedings, consumer protection is usually the top priority. No official federal organization for warranty protection exists, but the federal government could step in and promise to honor the warranties of an automaker in bankruptcy. That move would partially ease the fears of consumers and possibly spur sales enough to help the company recover, at least in the short term.

Congress is already debating a proposal that aims to encourage drivers to trade in older, less-efficient vehicles by loaning or offering a tax deduction for a new, fuel-efficient car. Proponents of the bill say that it has the dual benefit of boosting sales and helping the environment, while its detractors claim it won't have enough of an impact to change anything. It's clear, however, that the government will likely end up either loaning money to the car companies or paying for their warranties. Until this gets resolved, check your warranty (and extended warranties if you purchased one) so that you'll know how long your coverage extends.

Getting Replacement Parts
Will you still be able to get replacement parts to repair your car if your automaker goes out of business? It's possible that the collapse of a major car company could trigger a tidal wave of failures in related industries such as auto parts. The suppliers are already in trouble, and a sudden disruption to their sales could be enough to send many over the edge. Even so, if there's enough of a demand for replacement parts, other suppliers should be able to fill the void. There may be a short period of longer wait times for repairs and parts, but it probably wouldn't be permanent.

If your car insurance company guarantees the use of Original Equipment Manufacturer (OEM) parts for repairs, what would happen if these parts weren't available? In most cases, the insurance company would use the best quality parts available and guarantee the repair for the life of the car. But, most body shops and insurance companies rely on non-OEM parts, when their quality is said to be of like kind and quality. And, salvage yards still provide a great hunting ground for used parts that can be re-furbished. So, aside from the impact to the economy and the affected workers, a car company going bankrupt would probably not be a catastrophe for its customers.

What do you think about the possibility of American car companies going bankrupt? Would you buy a car from a company that might go out of business? Let us know, and we'll post the best responses later!

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