Gift Cards Lose Their Luster as Bankruptcies Loom

U.S. consumers who are already jittery about rising unemployment and higher food prices now have one more thing to worry about as the economy slows: the viability of their gift cards.

When retailer Sharper Image filed for bankruptcy in February, consumers were left holding worthless plastic cards after the seller of high-end gadgets and appliances initially stopped honoring its gift certificates and later liquidated its stores.

Kevin P. Casey / AP

And as reports of other high-profile retail bankruptcies—such as home goods company Linens 'n Things, department store chain Mervyn's and restaurant chain Bennigan's—trickle into consumer consciousness, holiday shoppers will become nervous about dropping hundreds of dollars on debit cards for stores that may shrink or disappear.

Consumers left holding gift cards of any retailers that declare bankruptcy could find their wallets filled with valueless plastic.

"I could see where gift card usage could drop 10 to 20  percent this year based on those feelings," said Britt Beemer, chairman and founder of America's Research Group. "Consumers don't know which stores are in trouble, but when you start seeing Linens and other retailers closing stores it does give you pause to say, 'Who is next?"'

Retailers generate as much as 40 percent of their annual revenue in the months leading up to Christmas, but this year is looking particularly rough as the slowing economy, job losses, a plummeting stock market and higher food prices crimp holiday spending. Bankruptcy experts warn that a failed holiday season often triggers bankruptcies for retailers on the edge.

"There are companies out there that might have enough liquidity to get through the (holiday) season, and if they don't have a good season, they're not going to make it," said Sun Capital Partners Inc managing director Gary Talarico.

Bankruptcy Laws

Linens 'n Things and Mervyn's, which are operating in Chapter 11 bankruptcy, still accept gift cards. Bennigan's company-owned restaurants shut down entirely, though many of the franchise stores remain open. But should any retailer suspend its gift-card program, there is little legal protection for consumers.

Under current bankruptcy laws, retailers do not have to honor their gift cards once they file for creditor protection in bankruptcy court. In the parlance of court dockets, gift card holders are considered unsecured creditors, who get reimbursed for a portion of their debt only if they file a claim and the company has enough assets to pay.

"Consumers should consider the financial conditions of the retailers they hold the cards for," said Stacy Janiak, vice chairman and U.S. retail leader for consulting firm Deloitte.

"It feels like cash in your wallet, but it isn't considered cash in bankruptcy courts. It can go to waste."

Last year, consumers snapped up some $26.3 billion worth of gift cards over the holiday season, according to the National Retail Federation. The NRF will release its 2008 holiday sale forecast in mid November.

Consumers who make down payments on larger purchases of furniture or other big-ticket items should also be wary when they think a company might not stick around.

Customers "have to be very cautious about putting a deposit out, because if a retailer does go bankrupt, they could be left holding the bag," said James Schaye, chief executive officer of liquidator Hudson Capital Partners.

Options

There are a few options for gift card holders.

PlasticJungle.com, a website which allows consumers to buy and sell gift cards, has said it will buy cards of companies that are in or at risk of bankruptcy. The site currently offers to buy a $50 Linens 'n Things card for $32.50.

And people who buy gift cards with their credit cards can sometimes get reimbursed by their credit card companies.

But the best defense may be to spend that card—and fast.

"Considering that I would buy gift cards for nieces and nephews, I have no concern about any retailer," said Deloitte's Janiak. "They will be out on December 26 spending that card."

Copyright 2008 Reuters. Click for restrictions.