Getting Consumers to Buy Cars from a Bankrupt Company

The auto industry says that if they have to declare bankruptcy, no one will buy their cars for fear of warranty failure and lack of parts.  A recent Wall Street Journal story casts some doubt on that assertion, but the logic makes sense.

I was listening to the great Clark Howard radio show yesterday and he mentioned that a big box retailer may go belly up after Christmas.  That would make me nervous about shopping there even before it filed bankruptcy.  It seems that the risk of GM and Chrysler going bankrupt would have as much of an effect as an actual bankruptcy filing.

Here's how they could avoid that problem.  (An attorney might want to tweak this suggestion.)

  • Form a warranty trust, funded with a portion of the sales proceeds of each car.  Right now GM (and I think the others) show a liability for warranty reserves, but in a bankruptcy the liability is just another unsecured claim.  Instead, form a trust that can only use its funds for warranty claims.  You might want a separate one for each model year.  If there is extra money left over at the end of the warranty period, because warranty claims were low, that money would revert to the company.  If there were insufficient money to pay all claims, the deficit would be another liability of the company.  But the trust would be separate from the company in a bankruptcy.
  • Add a clause to each car sales agreement regarding replacement parts.
    1. If the company or its contractors stops (for a specified length of time) making a part needed for repairs, the patent on that part becomes public domain.
    2. If a part goes out of production, the tooling to produce the parts must be sold at auction.
(There are similar clauses in book publishing contracts.  If the book that I wrote goes out of print for a specific length of time, I can ask the publisher for the rights back.  Then the publisher must either get the book into print or return the rights to me.)

These changes would probably make sense as soon as bankruptcy talk begins–which means already.