In 2008, as hundreds of California auto dealerships closed down, consumers trading in their old vehicles were often left with two car payments as a result of the dealer not absolving the trade in loan before they went out of business.

When a consumer trades in a vehicle in which money is till owed, the dealer promises to pay off the outstanding loan and then resell the vehicle. As dealers go out of business, some consumers are getting stuck with the bill. Lenders then go after the previous owner who thought the debt was paid, or repossess the car from the new owner who assumed it came with a clear title. Because the dealer defaulted, the consumers credit is often destroyed at no fault of their own.

To help these consumers, the California legislature created the Consumer Recovery Fund to pay for claims by California consumers who suffer losses after July 1, 2008. The fund helps consumers by:

• remitting license or registration fees received or contractually obligated to be paid by the consumer to the Department of Motor Vehicles (DMV).
• paying the legal owner of the vehicle transferred as a trade-in by a consumer to the dealer or lessor-retailer the amount necessary to discharge the prior credit balance owed to the legal owner.
• paying the lessor registered in accordance with California Vehicle Code Section 4453.5 of a vehicle transferred as a trade-in by a consumer to the dealer or lessor-retailer the amount the dealer or lessor-retailer agreed to pay to the lessor.
• paying the amount specified in a consignment agreement to a consumer after the sale of a consigned vehicle.

The money for the fund comes from a tax on automobile dealers for every new or used car they sell. The Consumer Motor Recovery Corporation (CMVRC) is a private corporation governed by the California Motor Vehicle Code and the Bylaws of the CMVRC. It is not a government agency or an insurance company. It is not associated with or controlled by any dealer or lessor-retailer of motor vehicles, nor does it represent any dealer or lessor-retailer of motor vehicles.

Below are some tips consumers can follow to avoid problems with dealers when trading in a vehicle with an outstanding loan or are considering buying a used vehicle:

• Try to pay off your loan before trading in the vehicle. If you can’t, try to find a reputable, financially stable dealer. They will be less likely to go out of business and more likely to honor their commitments if they do fold.
• Insist on seeing the title on a used vehicles to make sure it is in the dealer’s name and not the former owner. If there is a lien on the vehicle there should be a lien release attached to the title.
• Check the vehicle’s history. A reputable dealers will often provide them free.
• If you run into problems, complain to the agency that regulates auto dealers in your state.
• You may be able to file a claim against the bond the dealer posted with the state, but these bonds are usually too small to cover all the losses and payments are usually made on a first-come, first-served basis.
• As a last resource, you could try to sue the dealer, but a bankrupt dealer will usually not have any money to compensate the consumer.