What if a car maker goes bankrupt?

Eric Lai

SPECIAL TO THE STAR

Q: What happens to my warranty if the automaker goes bankrupt?

A: Mohamed Bouchama of Car Help Canada (carhelpcanada.com), a non-profit consumer group that assists members with automaker warranty issues, replies:

Usually, a company declaring bankruptcy will continue to service its customers to avoid alienating them. However, wary consumers may look elsewhere to third-party warranties for protection.

With this type of product, buyers must do their homework and make sure the company is insured, reputable and, especially, should read the contract carefully (maximum per claim, deductibles, what is/isn't covered). If an automaker closes completely, consumers aren't protected and have almost no recourse.

Eric Lai adds:

In the event of an automaker bankruptcy:

Under a Chapter 11 filing in the United States, the company continues operation while gaining court protection from creditors. Basically, the company is given time to renegotiate contracts, lessen its debt load, restructure and, hopefully, return to profitability. (In Canada, companies file for protection from creditors under the federal Companies' Creditors Arrangement Act.)

Warranties shouldn't be affected as keeping customers happy will presumably take priority.

No Chapter 7 bankruptcy filings (outright closure) are expected.

Existing financing contracts shouldn't be affected.

The residual value of autos may drop due to consumer fears over parts, service and later resale difficulty with bankrupt automakers' products.

Original equipment parts for new models are normally produced for 10 years by outside companies that supply the automaker. Even if the automaker dissolves, repairs and parts (OE and aftermarket) are available through independent service providers.

Independent shops, however, may have difficulty servicing newer autos unless automakers begin sharing proprietary on-board computer updates, diagnostic tools and technical data with the independents, cautions the Automotive Industries Association of Canada. The association is lobbying for "right to repair" legislation to ensure fair competition in the repair industry.

Certain add-ons can be purchased directly from an aftermarket company, which then provides its own warranty, rather than through the automaker. For example, many dealers sell rustproofing packages then have it applied by an aftermarket rustproofing chain. This fact alone shows that, contrary to a popular misconception, aftermarket rustproofing products – when reputable and properly applied – will not void your automaker warranty.

Kelly Hughson, a Mississauga Rust Check franchisee, advises that vehicles treated annually since new are guaranteed by Rust Check against corrosion for as long as you own the vehicle.

Aftermarket extended warranties may provide added assurance. These typically commence after the manufacturer's warranty expires – be it time/mileage or financial failure. As of April, dealers can only sell third-party warranties with insurance or credit-security backing, which guarantees coverage should the warranty company close, notes Don Brennan of Lubrico Warranty. However, the automakers' own extended warranties are excluded from this surety requirement.

Email your non-mechanical questions to Eric Lai at wheels@thestar.ca. Please include year, make, model and kilometres of autos cited, plus your name, address and telephone number.

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