Championing the cause for those holders is the Consumers Union, which is petitioning the Federal Trade Commission in an effort to protect consumers from losing cash on gift cards when retailers file for bankruptcy.
Gift cards and Chapter 11 became highly publicized and intertwined in the early stages of Sharper Image Corp.'s bankruptcy, mainly because it spawned a public spat between Sharper Image and Brookstone (Sharper Image first suspended its acceptance of gift cards, but then reneged when Brookstone announced it would accept Sharper Image gift cards at its stores). More recently, Linens Holdings Co. crowed over the summer when it received approval from a bankruptcy court to honor its gift cards. But CU has focused more on Linens' subsequent comments that it does not have the cash reserve to honor all of its gift cards.
The CU is trying to make sure that the standard changes.
"Gift cards shouldn't be the gift that stops giving when retailers go bankrupt," Michelle Jun, the senior attorney for the CU said in a statement announcing the petition.
The gift card issue is typically governed by a bankruptcy judge's decision. The cards are treated as debts, and it is up to the company to decide whether or not it is willing or able to pay them. That means many times any Joe or Mary trying to get a piece of their $50 back would have to file a claim like any other unsecured creditor and hope for distributions, which, depending on the case, could end up happening months or years down the road, if at all. Such may be the case with Sharper Image, whose unused gift cards still have roughly $20 million of credit on them.
The CU said it is trying to force retailers to maintain a reserve of funds from gift card sales so that they are always covered, regardless of a company's fortunes. The agency even wants the FTC to stick its nose into Chapter 11 cases and petition bankruptcy courts to force debtors to honor gift cards at full value.
Whether or not it will be successful in these efforts remains to be seen. But the issue is clearly gaining steam, and could represent an additional headache for bankrupt retailers in the future. - Ben Fidler
Comments
Finally! I work for a company that manages and tracks gift cards, and I've been following this issue on savvywallet.com. If the FTC passes this new law, this would make gift cards a safer purchase for consumers. I'm just surprised it took this long. Gift cards are still the #1 gift and should be protected. I wonder how long it will take? After every retailer files? Consider this. Last year $100B was spent on gift cards and around $8B was lost. I'm sure the numbers will be higher this year.