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Alabama Bankruptcy attorney Vonda S. McLeod shares thoughts and issues related to recent bankruptcy and consumer law issues.
Wednesday, July 2, 2008
Did Negative Equity Contribute to GM's Downfall
The current industry practice of rolling negative equity in new car loans could be a factor in GM's downward spiral. Negative equity occurs when a car buyer owes more on their vehicle than the vehicle is worth or than the dealer is willing to give on trade-in. In the past, dealerships have traditionally added in the negative equity into the total price of the vehicle which the car buyer finances. Of course, this means that not only does the brand new vehicle lose thousands in value when you drive it off the lot, but now the buyer has to pay thousands more for the vehicle because of the negative equity. (Fortunately, Chapter 13 allows the consumer to strip off the negative equity from the contract if the vehicle was purchased in the last 910 days before filing.) However, if the buyer defaults on the loan, the lender is stuck with the negative equity burden. Despite the potential losses, lenders, including GM who is one step away from bankruptcy, continue to pad loans with this non-existent collateral causing analysts to scratch their head.
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GM was the largest company in the world, and the # 1 car seller in the US. Their profits were in the billions. Now, they are a shell of their former self, and as far as being profitable, those days are gone! They are scraping to get enough cash to pay their bills.
The Negative Equity can occur when the value of the asset stays fixed but the loan balance increases because loan payments are less than the interest, a situation known as negative amortization. Thus negative equity may help to GM's Down fall.
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