What Bankruptcy Means for GM Customers

Four generations of Americans have grown up riding in General Motors vehicles, and there are at least 30 million on U.S. roads today. Few corporate downfalls could touch as many American consumers as GM’s June 1, 2009 bankruptcy filing. Here’s how it will affect people who own GM cars or are thinking of buying one:

Warranties will remain fully in effect on all cars that are still covered. GM says its sales and service operations won’t be affected by the bankruptcy filing, and it hopes that a smaller, more competitive “new GM” will emerge from Chapter 11 within weeks. With $50 billion in backing by the federal government, there’s virtually no chance that GM will end up liquidated while it’s in bankruptcy. To minimize concerns about GM standing behind its products in the future, the government has pledged to back up all GM warranties if necessary. The only possible downside is that some kind of government bureaucracy would be needed to process warranty claims if GM disappeared. But as of now that seems very unlikely.

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Resale values on GM vehicles could fall, due to general damage to the brand image and uncertainty about the company’s viability over the next decade. After Chrysler declared bankruptcy in late April, the three-year resale value of its vehicles fell by the equivalent of about $1,500 on a car that cost $25,000 when new. For people who already own GM cars, there’s not much they can do to offset that. People considering buying a GM vehicle should factor the possibility of a lower resale value into the purchase price. Car-research sites like kbb.com and Edmunds.com can help buyers figure out a fair price, taking all factors into account.

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Some fire sales could materialize over the next few months. “GM will be more eager than ever to move inventory through the dealer chain, which implies that there will be significant discounting and compelling incentives,” says Jack Nerad of kbb.com. Dealers slated to close will probably be the source of the best bargains, but buyers expecting lavish giveaways could end up disappointed. Dealers that are shutting down will generally have months to wrap up their business, which will allow them to draw down their inventory gradually, with incremental discounts. That’s a sharp contrast to some Chrysler dealers that had to liquidate their stock with less than two months’ notice.

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As always, smart buyers should be skeptical of the best-sounding deals. Cars that are cheap in the showroom will also be cheap when you try to resell them in a few years. (Remember, many of those other shoppers at the dealership will be looking for the same clearance price that you are.) The best approach is to first identify the car you want, then find the best price. And if you just want a new car, cheap, at least make sure it has basic safety equipment like antilock brakes and side-curtain airbags.

Deals could dry up surprisingly soon, probably by the end of the year. Bankruptcy will let GM close dealerships and assembly lines a lot faster than it could have done out of court, which means that a huge oversupply of vehicles will start to slim down quickly. Most analysts expect supply to get tighter by early next year—just as an economic recovery starts to take root and demand for cars goes up. That means prices will rise. A bankruptcy judge could also say no to big spending on incentives, effectively pulling money off the hood. Buyers can probably wait for a few weeks to see how the bankruptcy starts to settle out, but anybody who feels they’ve found a good deal on the car they want over the summer should probably grab it. That might be the best buying opportunity in a long while.

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Many models will be discontinued, which could produce some deals that seem much better than they really are. GM plans to close its Pontiac division, for example, and sell Saturn, Saab and Hummer. Some discontinued models might be a good deal at the right price, since they're similar to other models and dealers ought to be able to service them easily. But if Pontiac doesn't exist in five years, you might have a hard time selling that '09 G6 you thought was a steal. Carmakers and dealers don't always want you to know when a vehicle has been discontinued, since shoppers typically consider closeout merchandise to be less desirable. So ask the dealer--two or three times--then do a Web search to double-check if the car you want is slated to be killed off.

Dealers will still be plentiful, despite headlines that might suggest otherwise. GM aims to cut its sprawling network of dealers from about 6,000 to 3,600 over the next few years. That’s a big reduction—but it would still leave GM with more than twice as many dealers as Toyota, which doesn’t have a problem getting vehicles to buyers. Still, if you have a GM car or plan to buy one, it pays to know if your dealership is going to close, so you can figure out where you’ll need to go for service. Many mechanics can do routine work on your car, but you’ll need to go to a dealer for warranty or recall work.

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Finally, remember that GM will work like mad to win back car buyers. This is the company, after all, that launched the “Keep America Rolling” promotion after 9-11, offered employee discounts for all, and found one ingenious way after another to move the metal over the last 100 years. Bankruptcy restructuring will keep GM around long enough to dream up a few more dazzling promotions. Consider them skeptically. And if you decide to buy, enjoy the ride.