There are various reasons why a car dealership files bankruptcy. A decrease in overall sales and an increase in outstanding debts can leave a car dealer with no choice but to file bankruptcy, as stated by The National Law Review.
As witnessed during the global financial crisis in 2008, car dealerships in the United States were among the most affected, and many auto dealers were forced into bankruptcy, notes The National Law Review. As the banks that financed vehicle dealerships were increasingly affected by the crisis, the auto sector lacked enough funds to maintain its operations. An increase in operational costs and a decline in profits are some of the causes of a rise in debts among car dealers.
When a dealership is experiencing financial difficulties and is no longer able to pay the outstanding debts and support its day-to-day operations, it reaches a point that a bankruptcy is inevitable. Some practices also result in the creation of operational challenges that may lead to bankruptcy in a car dealership. For instance, floor planning, as employed by some dealerships, is risky and can result in high losses, according to The National Law Review. As such, lenders who do not wish to get involved in the close monitoring of car dealers tend to avoid dealers who use the strategy.