Wed, December 03, 2008
What Happens to a Gift Card When a Retailer Goes Bankrupt?
Sometimes, a well-meaning gift giver just doesn't know enough about a recipient’s needs to select “the perfect gift.” A gift card or gift certificate seems like a nice solution in that situation, but what if the retailer that issued the card subsequently goes bankrupt? In the present economic climate, it seems likely that a few retailers will go bankrupt in the next few months. Here are a few thoughts to keep in mind as you consider giving a gift card.
The Federal Reserve Bank of Boston recently published a helpful article on gift cards and bankruptcy. It not be obvious that a retailer is about to file for bankruptcy, but if you get wind that a company is struggling, you should avoid buying its gift cards. After bankruptcy proceedings have begun, a retailer may or may not honor gift cards and certificates previously issued; each case will be determined individually. You should urge those to whom you give such gifts to use them quickly. I’m not the best practitioner in this regard; some of the gift certificates that my wife and I received as wedding gifts weren’t used until a few years after we were married. I’m thankful that none of the vendors went bankrupt during that period….
Whenever possible, purchase gift cards using a credit card. This doesn’t guarantee that a gift card’s value will be protected in the event of a bankruptcy, but it will improve your chances of getting the funds back via a refund claim if a bankruptcy does occur.
Normally, retail gift certificates are governed by applicable state laws. In several New England states (Connecticut, Maine, and Rhode Island), retail gift cards are prohibited from having an expiration date; in Massachusetts, a gift card must be honored for at least seven years after issuance. Rules pertaining to gift cards issued in other states can be found at the National Conference of State Legislatures website. The problem is, these rules don’t apply once a retailer has declared bankruptcy. If a retailer has gone bankrupt and does not accept gift cards, the FRBB article highlights a couple of options.
First, it may be the case that a rival retailer will offer a promotion for holders of its bankrupt competitor’s gift cards. Earlier this year, after The Sharper Image (one of my favorite catalogs!) went belly up, holders of its gift cards were only permitted to redeem them by spending twice the value of a card in a single transaction. Competitor Brookstone took advantage of this by offering a 25% discount to holders of Sharper Image gift cards. Other retailers may follow suit in future bankruptcies.
Alternatively, the holder of a gift card can file a creditor’s claim in a bankruptcy proceeding. This is likely to be a time-consuming and only partially-fruitful course of action, as unsecured creditors seldom receive 100% of what is owed to them in a bankruptcy and the process can drag on for months.
Consumers lose several billion dollars in value annually through unredeemed, expired, or lost gift cards. Coupled with the potential for losses due to higher levels of retail bankruptcy over the next several months, this fact suggests that it may be wiser for you to give something other than a gift card this year.
Giving an actual gift will be the safest course of action, and ideally you’d always know exactly the right gift to give your intended recipient. In the real world, however, there are all sorts of circumstances under which that might not be the case. I realize that some folks consider cash to be a terribly gauche gift, but if the recipient would benefit more from cash than from a gift card that subsequently loses all its value, cash clearly is the better choice.