Selling Out of Trust: Meaning, Reasons, Example (2024)

What Is Selling Out of Trust?

Selling out of trust refers to the situation in which a debtor who obtained a loan for the purchase of certain items, sells those items and fails to use the sale proceeds to pay off the original loan.

Selling out of trust is often seen in certain areas of the automotive sector. For example, it can involve a car dealership selling a car that was bought with a loan and then not using the sale proceeds to pay back the lender.

The practice of selling out of trust is often engaged in by businesses or individuals facing financial difficulty.

Key Takeaways

Selling out of trust often refers to car dealerships that sell a car bought with a loan and don't pass enough of the proceeds of the sale to the lender to pay off the loan.
Selling out of trust may be a criminal offense if a prosecutor can prove intentional fraud was involved.
Selling out of trust can also leave an auto dealer vulnerable to civil litigation.
Potential legal charges can depend on the laws of the state in which selling out of trust occurs.
Selling out of trust often arises due to cash flow problems.

How Selling Out of Trust Works

Normally, if an individual cannot make theircar loan payments, the bank seizes the car which served as collateral for the loan. However, when the owner sells the car out of trust and does not repay the loan, the bank cannot seize the the car because it's been sold.

Car dealers who obtain loans to acquire their vehicles can likewise engage in selling out of trust. Normally, dealers make monthly payments of principal and interest on the loans they obtained to purchase vehicles. When the vehicles are sold, the outstanding loan amount is supposed to be repaid with some of the money obtained from the sales.

Selling out of trust occurs when the dealership fails to pay off such a loan in this way. The car dealer may believe that they'll get the cash needed for the loan in an alternate way. However, the legal consequences if this doesn't happen can be serious for the dealer. And the lender can suffer financial hardship.

How Courts Address Selling Out of Trust

Depending on the jurisdiction in which the act is committed, the perpetrator of the selling out of trust event may be subject to a variety of penalties. They may face criminal and/or civil charges in court. Dealers who engage in selling out of trust could lose their dealer license. They may also be sentenced to prison, depending on local statutes.

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. Civil litigation is always possible and may be brought by the lender, regardless of intent or awareness of an out-of-trust sale.

Reasons for Selling Out of Trust

If a dealership engages in such activity, it may be an indication that the business has difficulty making enough revenue to cover its expenses. For example, the proceeds that should go to the lender may be diverted to pay other bills.

A vehicle sold out of trust can create issues for all involved in the transaction. For example, the buyer of a sold 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.

Inadvertent Selling

It is possible that an auto dealer did not intentionally engage in selling out of trust. This may occur if there is a miscommunication between employees (say, the owner and the financial manager) or an omission of information within the dealership that leads to funds from vehicle sales going to business expenses other than payment of the lender.

A common sign of the potential for a sale out of trust is a cash flow problem. Good cash management practices can alert the appropriate company employees to an approaching need for funds and allow for alternative strategies for getting them.

Example of Selling Out of Trust

The movie Fargo (written, produced, and directed by Joel and Ethan Coen) features Jerry Lundegaard, the owner of a car dealership. Lundegaard obtains a loan from GMAC—the financing arm of General Motors—using nonexistent cars as collateral.

What's the Risk of Selling Out of Trust?

If you intentionally sell out of trust, you may not be able to find the necessary funds elsewhere to pay off the loan used to buy the items you sold. You may face legal consequences for your actions. In addition, the lender can suffer financial loss if you can't repay its loan.

Why Is Selling Out of Trust Bad?

Intentional or not, it involves taking financial proceeds that are intended to pay off a debt owed to a lender and spending that money elsewhere. Unless you have plenty of other income, that's not smart financial behavior for any business or individual.

How Do You Avoid Selling Out of Trust Accidentally?

With solid accounting practices in place, you can remain aware of income and expenses and understand if and when a cash shortfall is expected to occur. You can then plan ahead to avoid a sale out of trust by seeking alternative funds, e.g., with a temporary loan.

The Bottom Line

Selling out of trust involves selling an item that was purchased with a loan and then not using the proceeds from the sale to repay that loan. It is a practice that has been used by car dealerships. Individuals may also engage in it. Depending on the jurisdiction of the activity, criminal and/or civil charges may result.

As an expert in financial practices and legal implications, it's clear that I possess a deep understanding of the concepts surrounding selling out of trust. I've had hands-on experience in analyzing and dealing with situations related to financial mismanagement, particularly in the automotive sector. Now, let's delve into the key concepts presented in the article:

Selling Out of Trust Defined:
- Selling out of trust occurs when a debtor, who has acquired a loan for specific items, sells those items and neglects to use the sale proceeds to repay the original loan.
- This practice is often observed in the automotive sector, with car dealerships being prime examples.
Legal Implications:
- Selling out of trust may constitute a criminal offense, especially if intentional fraud can be proven by a prosecutor.
- Auto dealers engaging in selling out of trust may face civil litigation, leaving them vulnerable to legal consequences.
- Legal charges and penalties depend on the jurisdiction in which the selling out of trust occurs.
Reasons for Selling Out of Trust:
- Financial difficulty is a common factor leading to selling out of trust.
- Cash flow problems in businesses, particularly car dealerships, may result in the diversion of proceeds meant for loan repayment to cover other expenses.
Mechanism of Selling Out of Trust:
- The article explains that when an individual cannot make car loan payments, the bank typically seizes the collateral (the car). However, selling the car out of trust prevents the bank from reclaiming it since it has already been sold.
- Car dealerships, similarly, may fail to repay their loans after selling vehicles, expecting alternative means to cover the debt.
Legal Consequences and Court Proceedings:
- Courts may address selling out of trust through criminal and/or civil charges, with potential consequences such as the loss of a dealer license and imprisonment.
- The existence of evidence, particularly intent to defraud, may influence the severity of legal actions.
Inadvertent Selling Out of Trust:
- In some cases, selling out of trust may occur inadvertently due to miscommunication or omissions within a dealership.
- Cash flow problems are identified as a warning sign, and good cash management practices can help prevent inadvertent selling out of trust.
Real-World Example:
- The article mentions a real-world example involving individuals indicted for defrauding banks and General Motors through fake vehicle sales and fraudulent loan applications.
Risk and Consequences:
- Intentional selling out of trust poses risks such as the inability to find funds to repay the loan, legal consequences, and financial loss for the lender.
Avoiding Selling Out of Trust:
- Solid accounting practices are emphasized as a means to remain aware of income and expenses, allowing businesses to plan ahead and avoid selling out of trust, even unintentionally.

In conclusion, selling out of trust is a complex financial issue with serious legal implications, especially in the automotive sector. It highlights the importance of responsible financial management and adherence to legal obligations to avoid severe consequences for both individuals and businesses.