Dealers Stop Paying Off Trade-Ins as More Go Bankrupt and Close

You trade in a car you still owe money on and the dealer promises to pay off your current car loan so you can purchase a car from them. Then, to make matters worse, the dealer goes bankrupt and closes. Now you’re stuck with two car loans because the dealer never paid off your trade-in.

Or, you buy a used car and then it gets repossessed by the original lender because it was never paid off in the first place and doesn’t have a clear title.
These two situations are a new kind of auto industry crisis. As car sales drop and dealerships go out of business, complaints about these situations are increasing. And when the dealer doesn’t pay off your trade-in and you’ve stopped making the payments, your credit is affected big time.
"It’s devastating for people when it happens because they have two car payments and they can’t afford them," said Rosemary Shahan, president of Consumers for Auto Reliability and Safety. "Their credit is destroyed for no fault of their own because the dealer defaulted."
Some states have programs that require dealers to post substantial insurance bonds to repay victimized car buyers, reports the Associated Press. If your state doesn’t have this kind of program, or a poorly funded one, all you can really do is sue the dealership and hope for at least a small slice of the assets if the dealer has filed for bankruptcy.
California Sen. Ellen Corbett, a Democrat from San Leandro, has introduced legislation that would require dealers to prove they are paying off a vehicle’s lien before transferring the title.
Here’s the bottom line. Never trade in a car you still owe money on. If you absolutely must, get it in writing that the dealer will pay off your car loan in a specified amount of time. Most importantly, demand to see the title on the car you want to buy to make sure it doesn’t have any liens and that it really is paid off.