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What to do if your retail credit card issuer goes bankrupt

Keep paying down the balance, experts say

By Brian O'Connell

Henry Ford once said that "failure is the opportunity to begin again, more intelligently."

That could well be the path for millions of credit cardholders who see the retailers behind some of their cards go into bankruptcy, or worse, go under. So it's back to square one for anyone left holding the store's credit card.Bankrupt retailer credit cards

Chain store failures are a growing concern for cardholders amid a retail environment where big, brand-name stores are teetering like a college freshman at his first keg party.

According to retail industry guru Howard Davidowitz of Davidowitz & Associates, about 220,000 stores will close in the United States in 2009, as more Americans save and spend less in a consumer environment where money and credit are both tight. Davidowitz cites shopping mall mainstays like Nordstroms, Neiman Marcus, Tiffany's, Zales, Saks, J.C. Penney and Sears, as retailers who will be shuttering stores in big numbers in 2009.

Already, Circuit City, Sharper Image and Linens & Things have gone belly up, leaving big box parking lots emptier than the "find a friend" link on ex- Illinois Gov. Rod Blagojevich's Facebook profile.

So what's a cardholder to do? First, know the landscape. According to Babs Ryan, a Chicago-based global consumer trends analyst and the ex-director of card services for General Electric, most store credit card portfolios are not owned by the retail stores. "They are owned by private label companies such as GE or Citibank," she says. 

Ryan has some personal experience in working card issues with bankrupt retailers. "I worked for GE when Montgomery Ward closed and GE managed the card business," she adds. "Almost always, the outstanding credit card balance is still outstanding, and the cardholders will still get bills. As a cardholder, you acquired the goods on the credit cards, and made an obligation to pay over time with interest, and you still have that obligation."

Many people do stop paying, believing that if the store is bankrupt that they can keep the goods without ever paying for them.

-- Babs Ryan   
Global consumer trends analyst   

Circuit City cardholders hold cards that were underwritten by Chase Bank. Any payments, liabilities or issues pertaining to the card must be taken up with Chase. "If you have a negative balance with Circuit City, or with most retailers who have gone out of business, you have to pay the balance," warns Scott Testa, a professor of marketing at St. Joseph's University, located just outside of Philadelphia. "It's Chase that assumes the debt as it's the bank behind the Circuit City credit card."

In Ryan's experience, some consumers didn't seem to get the memo -- and subsequently set the table for confrontations with the retailer's financial backers.

"Many people do stop paying, believing that if the store is bankrupt that they can keep the goods without ever paying for them. I can also tell you that the companies who own the assets (balances due) will do everything they are legally able to in order to collect those assets," says Ryan.

Paper chase
While card customers dealing with bankrupt retailers will be notified of their obligations, if any, consumers still have some paper work to handle.

If the retailer is in a liquidation proceeding, your card payments may be redirected to a bankruptcy trustee collecting on the card carrier's behalf. "You'll get a notice from the bankruptcy trustee with instructions on how and where to make payment," says Mina N. Sirkin, a probate and trust attorney in Woodland Hills, Calif. "Do not stop paying your retail credit card, even if the retailer goes out of business."

If there's any good news, it's that cardholders dealing with the collapse of a retailer won't see any negative impact on their credit scores -- unless they don't pay their bills. Says Patrick Ritchie, author of "The Credit Road Map," the "account will reflect as 'closed by creditor' unless a cardholder calls and has it closed prior, in which it will reflect "'closed by consumer.'

Ritchie warns that the card may have to be closed in writing, and that some diligent follow-up may be necessary. "Consumers should check their credit report to see if it is already reporting as closed," he says. "Either way, this has little impact on the credit score. Where there is an impact on the credit score is the fact that the removal of available credit increases the credit utilization ratio. Thirty percent of your credit score is based on balances -- the ratio of balance to available limit is very important."

It's not going to get any smoother -- we're really at the outset of a vicious cycle, with more retailers threatening to go under.

--Scott Testa    
St. Joseph's University marketing professor   

Possibly more important, Ritchie adds, is the rewards program at a store such as Circuit City. According to Chase, Circuit City customers had to redeem their cards by Feb. 28, 2009. The stores shut ahead of schedule on March 8, 2009. For more information, check with Chase.

Expect bankruptcies to accelerate
If you do hold a number of retail store credit cards, don't be surprised if more stores go under, and private label card issuers come after you for any money owed. If anything, they'll be more aggressive about it, says Testa. "It's not going to get any smoother -- we're really at the outset of a vicious cycle, with more retailers threatening to go under."

"But if you know who you're dealing with, and what your liabilities are, dealing with a retail bankruptcy needn't be a big problem."

See related: Tips to get the most from bankrupt retailer's credit cards, Consumer groups ask FTC for tougher gift card protections

Published: March 10, 2009


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