Thoughts on politics, religion, violence, inequality, social control, change, and random other things from an autonomous, analytical, adopted, abolitionist, anarchist who likes the letter A

Car Contracts 101

March 22, 2010 By: Mel Category: Misc

A recent post over on Aretae got me thinking about the law.  Considering that I worked in it for ten years, it’s a bit odd that I don’t spend more time on it.  So let me dive in with a little 101 on my experiences with contract law.

For about four and a half years, I worked for a collection attorney.  Mostly, we collected money on car contracts, specifically on the balance left over after the car had been repossessed and sold.  Our biggest client was Ford Motor Credit Company.  We also did some work for Chrysler Credit and a few minor players.  Here’s what I learned while on the dark side.

Let’s say someone decides to buy a car.  They head off to the friendly Ford dealership.  The huckster salesperson up-sells them to a lovely vehicle that they can’t really afford.  Amazingly, even with crap credit and an $8 an hour job, they are approved by the finance company.  According to my old boss, quite a few dealerships had arrangements with Ford Motor Credit Company (a separate business from Ford Motor) wherein the credit company had to approve a certain percentage of submitted loan applications, no matter how bad the applicant’s credit was.

Faced with a contract written in legalese by a team of finance company lawyers, the buyer turns to the salesperson for clarification.  (That is assuming they can read the contract at all.  I never realized how many illiterate people there were in the U.S. until I worked in collections.)  The salesman explains things, but doesn’t really have any reason to be clear.  After all, he gets paid even if they buyer defaults.  There is no outside advice or witness to what is said by the dealership.

The dealer gets paid by the finance company.  The salesman makes their commission.  Meanwhile the car decreased in value the minute it was driven off the lot and the car contract is at 24% interest (uncommon, but not unheard of).  Escaping that interest is not an option as the contract most likely precludes paying the car off early to avoid interest payments.

If the buyer misses several payments, the finance company will repossess the car.  It will be sold at auction where the person who buys it at a bargain basement price might be with the repo company who took the car or with the used car side of the dealership where the car was purchased.

That money made at auction is applied to the total contract amount owed and the purchaser then owes the balance.  For an over simplified, made up, and slightly exaggerated calculation:

  • Car Cost   25,000 + Interest  @ 24%  6,000 = Total Contract 31,000
  • Less the Auction Price of 15,000
  • Balance owed for the car you don’t have 16,000

(Back in the early 90s, most of the files I worked on owed more like $5,000 – $7,000 on their contracts.)

The finance company tries to collect directly.  When that fails, they send the file to an attorney.  The attorney files a lawsuit and serves the purchaser.  If they do not answer within a certain amount of time, the attorney gets a default judgment for the entire amount.  That’s what happened to most people.

For those that did file a response, we submitted a motion for summary judgment and set it for a hearing.  Can’t get off work to go to a hearing?  No show meant automatic judgment.  Rarely did cases go to trial.  And I can’t recollect a single one that involved a jury.  I’m not even sure people could request a jury.

Coincidentally, I’m reading Howard Zinn’s A People’s History of the United States.  In it he talks about how the law was changed in the 30 years prior to the civil war in order to better suit capitalist development.  Specifically, he mentions that “judgments for damages against businessmen were taken out of the hands of juries, which were unpredictable, and given to judges.”  I suspect a little digging would find similar roots for contracts in general.

I should mention here that collections is a real paper mill.  The firm I worked for was working on file numbers in the forty thousand range for one client alone.  Everything is automated and automatic.  There is no way that the courts could handle the influx of cases if people actually started to respond to these things.  So the sheer volume of cases would surely make jury trials an impossibility.

Once a judgment is entered against you, it is recorded.  In Florida, it can be re-recorded for twenty years.  It will also accrue interest annually.  In the early 90s, in Florida, interest was about 12 percent per year.  A recorded judgment is a lien on your property.  It doesn’t have to be property that you owned when the judgment was put in place.  It is a lien on any property you have.

One poor shmuck was selling his house.  During the closing, a last minute lien check discovered an old car loan he had not paid off.  It had been sitting around collecting interest for 19 years.  He had to pay it off before he could sell his house.  Bet that took a chunk out of his earnings.

The finance company really cannot lose. In our previous example, they paid the dealership the price of the car 25,000.  They received 15,000 from the auction.  That leaves them at negative 10 grand.  (In reality, most people made a few payments before defaulting – sometimes years of payments.)  Even if you don’t pay, they get to write off the entire $16,000 as a loss.  That’s $16,000 of income somewhere else that they won’t have to pay taxes on.  And even after they write it off, there is still a good chance they will collect eventually (with the additional interest accumulated on a judgment).

Of course, this whole process starts before you actually decide to go to a car dealership.  It is next to impossible to live in many areas without a car.  And if you think that car companies didn’t use their influence to see roads built with your tax dollars, there is a lovely bridge in Brooklyn that I’d like you to see.  Every zoning ordinance and city project that promoted urban sprawl benefited car companies at the expense of public transit and (I would say) our quality of life.

There is so much wrong here, it is difficult to know where to begin.  In the interest of length, I’m going to stop here and post my thoughts on the problems and maybe even some solutions on Friday.