Carvana Bankruptcy Concerns: What They Mean for Shoppers

The headlines aren’t good.

“Carvana Shares Tank as Bankruptcy Concerns Grow”

“Carvana: Bankruptcy May Be Inevitable”

“Carvana Stock Slides on Bankruptcy Risk”

If you’re shopping for a used car, this can make it sound like one of your most prominent buying options is disappearing.

What does the looming threat of a Carvana bankruptcy mean for used car shoppers?

What Caused Carvana’s Troubles

A quick recap. Carvana is an online used car retailer that grew rapidly during the COVID-19 pandemic. It promised easy transactions and could deliver a car to your home. As COVID spread, studies showed that car shoppers preferred as little contact with dealerships as possible. That made Carvana’s system an ideal solution for many.

And, like many companies with great new ideas, it grew fast. It opened sales lots with glittery, 8-to-12-story “car vending machine” elevators. Brightly lit, they serve as huge advertisements for the idea that you can buy a car without interacting with anyone.

As it grew, used car prices soared. A global microchip shortage made new cars rare and expensive, sending would-be new car buyers, with their higher budgets, into the used car market. Carvana used the profits and the buzz to grow.

In the interest of disclosure, Kelley Blue Book parent company Cox Automotive does some business with Carvana. One of Cox Automotive’s other brands, Manheim, sells used cars wholesale to dealerships and provides reconditioning services that prepare cars for sale. Manheim is the largest company in its industry and has worked with Carvana and almost every other used car retailer.

Kelley Blue Book’s editorial staff does not interact with Manheim, and Manheim also services virtually every competitor of Carvana.

When used car prices began to fall, it found itself with a huge inventory it had bought at relatively high prices and now had to sell for lower ones. It also found itself with enormous overhead – everything from delivery driver salaries to leases on vending machines – and borrowed money to stay afloat.

What Triggered Warnings This Week

First things first: Carvana hasn’t declared bankruptcy. The “Amazon of used cars” might do so. But it might not.

The company is clearly in trouble. Its stock – which traded for over $360 last summer – is trading at $3.83 at press time.

But what triggered this round of warnings wasn’t an actual bankruptcy. It was, rather, news that the company’s biggest creditors had signed a deal that binds them to act together during negotiations over restructuring Carvana’s debt.

The banks that have lent Carvana money clearly believe the company cannot pay them all back what it owes.

A few analysts believe Carvana can manage to restructure its debt and survive. Others think its business model is fundamentally too expensive to profit in a normalizing used car market.

Bankruptcy Doesn’t Mean Going Out of Business

The word “bankruptcy” triggers images of financial death. But a list of companies that have declared bankruptcy would probably surprise you.

In the automotive world alone, it includes General Motors and Chrysler. And they’re still in business. So are energy giant PG&E and oil brand Texaco.

They’re still around because bankruptcy isn’t death. It’s a court-controlled process that restructures a company’s debt.

Some bankrupt companies go out of business and sell off their assets (known as Chapter 7 bankruptcy). Others get a second chance with a new structure (Chapter 11).

It’s too early to know what the future holds for Carvana. But it’s possible that the company could declare bankruptcy and still be in business decades from now.

You Can Still Buy a Car from Carvana

If you’re car shopping today, buying from Carvana is still as safe as it was yesterday.

Used car sales are, for the most part, governed by state laws. If the company goes bankrupt, your rights stay the same.

Buyers have almost no relationship with the dealer they buy a used car from once they drive it off the lot. Carvana provides 100-day limited warranties on its used cars, but Carvana is unlikely to disappear within the next 100 days. If it files Chapter 7 bankruptcy and goes out of business completely, the court will likely require the settlement to honor existing 100-day warranties.

Is a Fire Sale Possible?

Carvana is likely to sell off some property, close some sales lots, and shutter some brightly-lit car vending machines in any restructuring.

That probably won’t mean a going-out-of-business sale, however. Used car prices are still more affected by overall market conditions than by the local conditions of one sales lot. The company might sell down its last stock, and there’s no harm in making them a low offer on something. But we expect market forces to keep prices fairly steady in any outcome.

Carvana Shoppers Should Still Ask for Proof of Title Before Signing

That doesn’t mean, however, that buying from Carvana is problem-free. It just means that the threat of bankruptcy doesn’t change the risks much.

Carvana customers in several states have reported a different problem – the company doesn’t always have proper paperwork on every car it sells.

Carvana has lost its license to sell cars in Illinois twice,  been suspended from operating in parts of North Carolina, and had its Florida business license threatened, all because of title problems.

The company grew so quickly, and acquired used cars so fast, that it sometimes sold them without completing all the necessary paperwork to pass titles to new owners on time. If you’re considering shopping with Carvana, make certain they have the title to the car you want and that they can pass it to you promptly. That’s ultimately a bigger concern for buyers than bankruptcy.