General Motors have declared bankruptcy, and thousands of dealerships are being consolidated or closed. Consumers are understandably confused and worried about what that means for them. Below are some quick answers to some very important questions.
What happens if my car brand goes bankrupt?
When individual brands are in financial trouble (such as Volvo), they are usually sold by one automaker to another. This has limited impact on the consumer. If a brand goes completely belly-up (Hummer, Pontiac, Saab, Saturn), "sister" brands from the same parent company (GM) will honor both standard and extended warranties, as long as extended warranties were manufacturer-backed.
What happens if a parent company, such as GM or Chrysler, goes out of business?
Automaker bankruptcies are "structured," meaning that the companies will still make vehicles in some form and employ a workforce (albeit reduced). On March 30, 2009, in an effort to reassure the car-buying public during the restructuring of domestic automotive companies, the federal government announced that it will back the warranties on new domestic (Chrysler, GM) vehicles purchased during the companies' restructuring — even if the manufacturer eventually goes out of business. The Warranty Commitment Program is automatic; buyers don't need to do anything to qualify.
Whether your car's brand shuts down or the parent company declares Chapter 11, the resale value of your car will drop. Unless you're taking advantage of the Cash for Clunkers bill, it may be a good idea to buy an extended warranty from the automaker and drive the car until "the wheels fall off."
What happens if my local dealership goes out of business?
In 2008, a record 881 U.S. auto dealerships closed, and more than 2,300 more will close in the coming months. This affects consumers in several ways.
- You will be able to get warranty service from another dealership, but you may have to travel farther. This could be a real issue if your car needs work that requires more than a few hours.
- In the short run, dealership closures may mean fire-sale prices on thousands of vehicles. But in the long run, fewer dealerships means less competition among them and thus potentially higher prices when it's time to buy a new car.
- Consumers in some areas may have trouble finding their preferred brand locally, which means fewer choices when it comes time to buy.
- If you've already purchased a car from the brand's lone dealership in your area, and it closes, it may be very inconvenient to get warranty service — or any manufacturer-based service — locally.
- Many dealerships may close their new car sales division but open or maintain one for used cars. Many will also retain their service capabilities — because that's where the profit is today.
What happens if my extended-warranty company goes out of business?
It's important to distinguish among three types of extended warranties:
- Manufacturer-backed — these warranties, which are valid nationwide, will be honored by the parent company or the federal government, as noted above.
- Dealership-backed — valid only at the dealership where you bought it, so if the dealer goes out of business, you're out of luck.
- Independent (a.k.a. aftermarket) — a third-party warranty company underwrites your warranty, but these companies can — and often do — go out of business.
Sometimes, dealerships sell their own dealership warranty or an aftermarket warranty because they generate more profit than on manufacturer-backed ones. If a dealer sold you a warranty from a third-party company that has gone out of business, you may be able to appeal to the dealership — assuming it's still in business as well. Hopefully, the dealer will try to make good on the contract or offer a significant discount on a replacement warranty.
So does all this potentially bad news mean you should trade in your domestic vehicle for something more secure? Not really. From a strictly economic standpoint, holding onto your car is smarter than trading it in, particularly now, when resale prices are depressed. But if you're shopping for new wheels, you can be confident that, in one form or another, those manufacturer-backed warranties will continue to be valid. Plus, with the glut of excess inventory that these shutdowns create, there really has never been a better time to buy a new car.