Zombie Trade-Ins! When The Dealership Goes Under, Your Old Cars Come Back To Haunt You
Meet Christine O'Kelly. She just bought a new Kia and traded in her old car. Kia of La Quinta, California sold her a new Sorento and offered her $4,000 for her trade-in. They then took the other $4,000 she owed on her old car and rolled it into the new loan. That was in October. Now she's getting calls from former employees of the now out-of-business dealership — telling her that she is still responsible for the trade-in and had better come pick it up.
"They told me they didn't have the money to pay off my car and I needed to pick it up in San Bernardino," O'Kelly told KESQ. "I was still financially responsible for it."
She was also told that she has until Friday to pick her car up or it will be sold at auction by the bank that shut down the dealership.
"I'm either going to have to make two car payments on a car I don't have or it's going to hurt my credit," O'Kelly said. "It's Christmas time. I'm a single mom. I don't have the money to be making two car payments."
We did a little research and learned that this problem isn't unique to Ms. O'Kelly. In fact, California passed a new law that protects consumers from this very situation, according to the Los Angeles Department of Consumer Affairs.
They say:
Many consumers who trade in their used cars when they buy a new car often still owe money on the trade-in. The understanding between the consumer and the dealer is that the dealer will pay off the balance owed on the trade-in so that the consumer will incur no further charges.
Typically, however, the sales or lease contract for the new car does not specify any time for the dealer to pay off the trade-in. If an unscrupulous or financially strapped dealer does not pay off the balance on the trade-in quickly, the consumer remains liable on the old contract while having to make payments for the new car.
..
If a dealer who engages in the above practices goes out of business or files bankruptcy, consumers are unable to recover money directly from the dealers and thus incur substantial financial loss.This new law establishes a program to compensate consumers if a dealer shuts down or files bankruptcy before paying off the trade-in, license and registration fees, or sales proceeds from a consigned vehicle.
If this has happened to you, and you live in California contact the LA Department of Consumer Affairs or the California Attorney General and ask them about your options. You can also read the full text of the new law, here.
Kia of La Quinta Closure Puts New Car Owners in Corner
[KESQ] (Thanks, Traveler!)
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Comments:
This stinks.
With GM about to axe so many dealers, how many more times are we going to read about this?
Worrying.
If the trade-in is worth $4,000, assuming they didn't monkey with the numbers (e.g. boost the trade-in and sales price at the same time to hit some bonus quota) then she should pick up her old car and drive it strait to a Car Max and sell it there, and pay off the loan herself. Assuming it was a valid trade-in price she should be able to get that much from Car Max, and they'll buy the car from you (at their quoted price) even if you're not a customer.
Ok, so let me get this straight, she owed 8k, they gave her 4k for it and then rolled the other 4k into a new loan. So now she has the loan for the Sorrento - 4k for the trade + 4k from the previous loan = original amount for the Sorrento. Now they're giving her the car back and she still owes 8k on it. It sounds like it worked out exactly as if they just never accepted the trade. Yeah, it sucks because she now has to go sell it, but she should be able to get 4k pretty easily if a dealership was willing to give that much as a trade in value.
@humphrmi: Or put it up on craigslist for $5500 and sell it for $5k, I've never seen any dealership (including carmax) that'll give you as much as you can get private party, although it does take more effort.
Yet another reason to sell your car on your own.
I wonder if it possible to get the dealer to give you a cashier's check for money to pay off the old loan at closing, and for you to just pay off the loan yourself?
I'm pretty sure you have the right idea here. If she has a piece of paper saying the dealer has taken possession of the car, then if someone tries to wreck her credit over this, all she has to do is contest it with the credit bureaus and show them this piece of paper as proof that it's no longer her problem.
Depending on how long ago it was, being able to sell or trade in the old vehicle might not be as good an option as you think. Most vehicles, until they become "collector's" items, will depreciate in value over time - even with no additional mileage.
Thus what might have been a $4,000 trade in value a few years ago might only be $2,500 today.
Yet another good reason not to trade in your old car. You can almost always get more from a private buyer than the dealership will give you.
If they rolled half the trade-in's value into her loan, isn't she already technically paying "two car payments"?
And since when is it economically feasible to buy a NEW car when you haven't even paid off the old one?
@nataku83: Since I'm a little geographically challenged, I looked it up and it sounds like she has to drive 80 miles each way to pick up the old car, but it's not like she's "going to have to make two car payments on a car [she doesn't] have or it's going to hurt [her] credit" She SHOULD still legally possess the car, which is what it sounds like is the case.
@nataku83: But isn't she still in trouble? If she sells it for $4 or $5K, doesn't she still owe $4K plus the Sorrento loan?
Let this be a lesson; Never buy a Kia.
@Oranges w/ Cheese: Well sir, I believe that is the root of the problem. Also, if she got 4k on the trade, her trade-in must have been in pretty nice shape (not a junker). As a "single mom" she probably should have driven it until it stopped making financial sense (repairs were costing more than a car payment), then purchased a nice used car, maybe even just a 2 or 3 year old model with under 30k on it.
Right, the 4K addition to her car loan would've been lost.
@nataku83: Actually, I have to correct my original comment. In most cases, since she still has a loan on the car, she can't just sell it and take the money, since she doesn't have a clean title. The only way to unwind this is to find another car dealer (ie Car Max) who is willing to take the car and loan papers and pay off the loan themselves with the proceeds that they would have given her. And if they aren't giving her enough to pay off the loan, then she may have to come up with the difference herself, before the transaction can complete (otherwise Car Max won't be able to get the title.)
If Car Max is willing to do this, they are probably going to charge for the paperwork on their end, but again it's still better than having two loans.
I don't know if there's a clean way to do that private-party.
I hate to pile on this poor lady, but why would you buy a new car before you paid the old one off? I hope to Dog, that she wasn't still making payments on a clunker. How long are car loans these days?
Seriously, single moms and the rest of the world that is down on their luck, the joy of making car payments is that eventually you should get to a point that you don't have to make any more payments and then you get to drive a car that you own free and clear. During those free and clear years you should put money aside each month in a high yield savings account so when the time comes that you actually need a car you can pay cash for it.
@nataku83:
+1
Sounds like this single mom isn't making very good financial decisions... it's too bad she is stuck in this mess now, hopefully what she can take out of it is that rolling her old car's negative value into a new car is never a good plan.
Domestic manufacturers have been absolutely famous for that, particularly combined with their high discounts from msrp and customer "bonus" cash offers--the bank finances a car for 110% of MSRP and that particular model almost never walks out the door for more then 85-90% MSRP ... the spread pays off the last mistake the customer made and the cycle continues...
It's just the housing market... the stock market and all the other nasty financial sh*t going on today.
I wonder how they got former employees of a defunct business to start making difficult calls to customers. If my employer went out of business I wouldn't keep working for them out of the kindness of my heart. ;-)
@Oranges w/ Cheese: Some people gots to have their new cars. Honestly, a lot of people don't even understand what happens when the dealership says "we'll pay off what you owe on your old car!" and think the debt disappears or something.
Since the dealership did not perform their contractually obligated duties, this woman's car has been stolen from her. What about an insurance claim?
@SadSam: This is very common, and has been going on for a long time - Dealers push these deals because it increases their cash flow (especially when they can sell the trade-in car quickly) and helps them make a quick sale. A lot of people aren't so lucky that they make enough money to be able to save up for a car.
@SadSam: Credit debt first. I own my car. it's a 2005. it has a 10 year 100,000 mile warranty on it..I will not get rid of it until 2015 unless something happens to it. I MIGHT, however, get a new pain color. I hate silver(they gave me a discount to take the silver model off the lot instead of waiting for the red one.)
@SadSam: I have heard that you can get 72-month car notes these days. It's insanity. If you've been paying attention, you'd already know that many Americans do this, and often end up owing WAY more than their new car is "worth" on day 1 because the ever-helpful finance guys at the new-car dealership rolled in the negative equity from the PREVIOUS car they "traded in" to get them a shiny new one. Then the stealerships turn around and sell them gap insurance at terrible rates, and scare them into buying it because of how far upside down they are in their new car.
I would never do a trade in on a car I didn't own free and clear. I trust car dealers about as much as I trust people selling designer watches on street corners.
@SadSam:
I had a guy at work here who bought a Dodge Ram for $32K with a 72 month loan... 6 freaking years... and it was at a crazy high (for the term) rate too, something like 7%... at the time I figured it out and he was going to be paying about $8K in interest over the life of the loan. Of course he was convinced that he would be able to pay it off sooner, I wonder if he ever did? He was laid off 6 months ago.
I've seen 84 month advertised around here...
My aunt gave me a rule of thumb that has been invaluable... she calls it "$3000/$300/36 or less" ... If you can't own it for less then $3000 down at purchase and a payment of $300 or less over a term of 36 months of less then you can't afford it... that works out to something like $13,000 before taxes, dealer fees, etc... so even if you have no trade in at all you can still get a decent used (or even a really cheap new) car for that...
@admiral_stabbin: You might if you were an officer of the corporation and could end up with some legal responsibility... you'd be better off if you could scare your former marks..er.. customers into coming and picking up their old cars for which you legally agreed to take responsibility rather than having them try to actually enforce performance on the contract you signed with them.
@humphrmi:
It makes me sad, because this woman clearly has enough money to save up for a car. If you have enough money for a car payment each month you have enough money to save up. Instead of writing a check to the car company each month you put that money in the bank and you wait until the current car becomes too expensive to maintain then you tak the money you have in the bank and you buy a new car. Even if you don't have enough to buy a car free and clear you should have enough for a nice down payment. I'm assuming, and maybe its a bad assumption, that if she was still making payments on car #1 it was still running pretty well. It makes me sad that people think they need a new car every two or three years because such behavior undermines long term (and short term) financial health.
First of all, doesn't the new law protect her? The website says "Starting July 1, 2008, consumers can apply to the CMVRC to recover losses of up to $35,000 per vehicle for unpaid trade-ins, registration and license fees, or consigned vehicles." [dca.lacounty.gov]
Second, I'm not sure why trading in the car doesn't relinquish her responsibilities on the car. The dealer accepted the trade in and, therefore, it's their responsibility. Maybe this wasn't explicit in her contract? [actually, after reading the linked article, it's clear that the dealership never transferred the ownership to them. That's apparently how this happened, but Consumerist left out that very important detail].
Third, if the car dealership never transferred ownership, then how can the bank sell it to satisfy the dealer's debts? The dealer doesn't really own it: it's not theirs to sell. On the other hand, the contract that she signed may change that.
@SadSam:
Exactly- buy a new car and run it into the ground time wise. The bank owns the car for the first 5 years (60 month loan) I own it for the second 5 years, and then any time after 10 years is gravy.
As for maintenance figure on $500 maintenance years for the first 5 years (hopefully you have a good warranty), up to $1000 yearly for the second five years- but cumulatively- maybe one year only $300 but the next is $1700 etc. Remember that $1000 over 12 months is only abour $84 a month which is alot better than a $400+ month car payment per month...
@SadSam: It's possible the original car didn't suit her needs, so she wanted to trade it in for a better car instead of continuing to make payments on a car she didn't like. As for the payments, I know it's a regrettable way to buy a car, but maybe she needs a vehicle and can't afford to wait long enough to accrue enough savings.
@solareclipse2: You can bet that any papers the dealer makes you sign are all about taking rights away from the buyer and granting powers to the dealership.
A spoiled, young, inexperienced coworker at my previous job drove a used extended cab Dodge Ram that was killing her in gas cost (even 3 years ago pior to $4gal/gas)plus the payment was high. (Her cowgirl lifestyle was a little hard to maintain when she had to pay her own rent and support her child by herself versus living at home mooching off her parents... She wondered out loud about trading it to a local new car dealer who "pays of the trade when you buy a brand new model x economy car".
We had to educate her that the trade isn't actually paid off clear but the debt is rolled into the new loan so she would end up not only owing for the value of the economy car but also the pay off on the truck combined... Silly.
She then would later get fired for being zoned out too much due to lack of sleep/ partying all the time...
@TVarmy:
True, especially since she has kiddos.
But my last car didn't meet my needs for about the last 4 years, it was two doors it was too small and all my friends had fancy cars and I certainly felt pressure to get a new car to keep up with my peers. What did I do, I kept driving it and I made at least one $1000 repair the last year I owned it (that was painful). I was complaining to anyone that would listen about how I hated the car and it was a waste to put money into it when I hated it. But instead of caving to my selfish desires I kept driving it, a couple of times I rented a car for long trips, and I kept saving and I bought a new to me (2006) car this fall and paid cash for it. All my friends cheered!!
@Corporate_guy: problem is that then you might not pay off the loan and they'd be screwed, since they'd be sitting on a car that they don't hold a clear title on.
@rubinow: unless I misunderstand the concept of a "loan", I can't reassign my responsibility to somebody else. Say we do this:
I borrow $5000 from you.
I tell that homeless guy over there "hey, if you accept my debt to this guy, I'll give you a beer" and he says yes.
I tell you "sorry, I know I owed you money, but this guy agreed to pay it off for me so now you have to talk to him."
It doesn't work that way - the loan company (you) made the agreement with the borrower (me), and in order to transfer that debt to somebody else, both parties have to approve of it. (Me asking you "is it OK if that homeless guy takes over my debt to you?")
It's a tough life as a single mom, but if she had time she could have sold the car privately and not get screwed by the dealer. I would never trade in a car when I could get better money for my car somewhere else.
nataku83 - great point - but actually that's NOT what happened! This is my story. I owed $8000 on the car. They bought it for $4000 - and I was responsible for the other $4000 which was rolled into my new loan. Meaning that I am supposedly responsible for
1. The $4000 that was rolled into my new loan
AND
2. The $8000 that still remains on my old loan.
Even if I sold the car at the Bluebook value of $4000 (which is what the dealership bought it for) I would still be responsible for the other $4000 on the loan... which I am ALSO paying in my new loan! That's a total of $8000 - ahhh!
---Consumerist.com---
Thank you SO much for informing me about this law - I hadn't heard of this and will ABSOLUTELY be following this lead!!!
@GearheadGeek: I first heard of an 84 month loan (7 years) in late 1996 when I worked with an idiot doper who traded his ragged 1978 Firebird for a "new" 1995 Firebird. He supposedly still owed the buy/here pay/here place for the '78. I quit for another job and heard that he was later fired. I figured that the '95 eventually got repo'ed as 2 years later I saw him driving a POS 15 year old Toyota Celica...
And who wants to bet that the people running the dealership will have a new one open in a year or less and start all over again with a clean slate?
I just did that. I wanted to wipe out another loan for a car I kept and the dealer cut me a cashier's check to pay off the other loan.
Was it the best financial decision? No, but it afforded me much needed cash-flow and the amount I'll pay in interest is negligible.
my ex and i had a similar situation happen to me in san diego a number of years ago. this was before the law changed where there is no cooling off period for automobile purchases. we traded in a dodge charger that had an outstanding loan for a newer car.
about a week after the transaction the dealership tells us they couldn't finance the loan through a credit institution. we were to make payments on the new car directly to them. having a bad feeling about the situation i called chrysler credit regarding the older car. sure enough, the loan wasn't paid off.
we were now responsible for two car payments. one on an automobile we didn't have possession of.
when we called the dealership to discuss the payoff on the charger, they told us the car had been sold to a wholesaler. falsehood easily exposed when we showed up on their property. the car was on their lot with a 'for sale' sign.
after three weeks of back and forth we were able to return the new vehicle and have the older one returned to us... damaged on the front end significantly.
being naive twenty year olds and just happy to have the car back and only one car payment, we didn't pursue any repairs from the dealership.
Wow. I never knew that you could be responsible for your old car after you traded it in. I always though there was some sort of paperwork that absolved you of the responsibility of the old vehicle. You know, something that legally made the dealer have to hold up their end of the bargain.