The Expert Podcast

So, what does it mean when a dealership goes out of business? How do clients have to deal with that? What are the consequences and what are the risks if you purchase a vehicle from a licensed automotive dealership? In theory, they're supposed to provide you with a title, all the necessary documents, a legal vehicle, and complete the transfer. However, when a dealership goes out of business, there's always a risk that the last few cars sold may have some type of transfer problem.

In this case, we're going to talk about a company called Shift, which is a very large online retailer. They recently filed for bankruptcy. They weren't the only ones; within the last few weeks, there was Off Lease Only out of Florida, another company out of Texas, and many other large retailers are closing and going bankrupt. Even smaller dealerships, like the American Car Center, were affected last year.

The worry and the risk are that if you bought a car and they didn't transfer your title, and now the dealership goes bankrupt, what happens to your ownership? If the dealership didn't actually pay for and purchase the vehicle, you could have a problem. Many dealerships use what's called a floor plan or a line of credit for their vehicles. Look, if you have a car lot with 200 cars, each worth $50,000, that could mean millions of dollars in inventory value sitting on that lot. Most companies don't have that kind of cash just laying around, so they get a line of credit from a bank to finance their inventory.

When they sell a car, they pay off the cost of that specific vehicle, get the title from the lender, and then transfer it to you. But what happens if, right before they go bankrupt, they don't have the money? Obviously, they're going bankrupt and haven't paid off those cars, so now you're in limbo as a buyer, and you could face title problems. This has happened before.

You want to make sure there are no liens on your vehicle. Sometimes vehicles are obtained from lenders, and the dealership must pay off the loan for the lender. In some cases, it’s even worse. Let’s say you went to a car dealership and traded in a car with a loan on it, expecting the dealership to pay off your loan as part of the deal. If the dealership goes out of business within the next few weeks or months, and they don’t pay off your car loan, you may have to make payments on both your old car and your new car. Meanwhile, your old car is gone, and the person who bought it can't get a title either.

There’s a lot of risk when it comes to a dealership going bankrupt. What we recommend is that, if you're buying a car from a dealership, especially a used car, ask them to show you the title of the vehicle before you sign on the dotted line. They don’t have to give it to you, especially if you're financing it. Even if you're not, they still have to transfer the title to your name. However, if they can at least show you they have the title, it will help protect you from the risk that they don’t own the vehicle yet. Many dealerships sell vehicles they aren't the legal owners of because it’s tied to a line of credit or under a lien holder, which is okay in some cases. But you don’t want to be caught in a bad situation.

If they don’t have the title, you might want to ask, “What's going on here?” If you’re a consumer who bought a car from Shift, or one of these other companies, and your dealership closes down, you should start making contact right away. Where’s my title? Call the DMV or visit in person and ask them, "Has my title been applied for?" If it has, and they’re just waiting for it to go through the DMV, that's okay. But if they didn’t apply for it and the company is out of business, that could be trouble.

There’s more information on lien releases on our website. You can also opt for a consultation with a certified title agent. But dealerships selling cars and going out of business before the title transfers is becoming a bigger problem, and it’s expected that more car dealerships will close or go bankrupt in the coming years. This could become a widespread issue.