DEFINITION of Selling out of Trust
Selling out of trust is a phrase commonly used in the automobile industry to refer to the illegal sale of a car that has been paid for with a loan and then not using the sale proceeds to pay back the lender. This practice may be engaged in by car dealerships or individuals facing financial difficulty. Normally, if an individual cannot make his/her car payments, the bank takes back the car. When the owner sells the car out of trust and does not repay the loan, the bank cannot seize the loan collateral (the car).
BREAKING DOWN Selling out of Trust
Dealers who obtain loans to acquire their vehicles can likewise engage in selling out of trust. Normally, a dealer pays monthly interest in the loans used to purchase vehicles until the vehicles are sold, at which point the loan is supposed to be repaid.
While this term is commonly used in reference to car sales, it can also be used in other situations where a debtor sells an item without passing the sale proceeds to the lender.
How Courts Address Selling out of Trust
Depending on the jurisdiction where the act is committed, the perpetrator may be subject to a variety of penalties. They may face criminal as well as civil charges in court. Dealers who engage in selling out of trust could lose their dealer license. They may also be sentenced to prison, dependent on the statutes for the jurisdiction.
If a dealership engages in selling out of trust, it may be an indication that the business has difficulty operating and covering its expenses, with the proceeds that should go to the lender potentially diverted to pay for other bills. When a vehicle is sold out of trust, it can create issues for all involved in the transaction. For example, the buyer of a vehicle might not be able to secure the title to the car they are driving because the dealer did not clear the title at the time of sale.
It is possible that an auto dealer did not intentionally engage in selling out of trust. This may occur if there is a miscommunication or omission within the dealership that leads to funds that should go to the lender instead are put towards other business expenses. The specific laws of each jurisdiction may vary, but in some instances there must be evidence of intent to defraud for criminal guilt to be proven. There is still the possibility of civil litigation, which may be brought by the lender, regardless of intent or awareness of an out-of-trust sale.