Getting your deposit back when a company goes bankrupt
If you paid with a credit card, your odds of a refund go up
You've put down your deposit in good faith: a dream wedding venue, a custom sofa, a family photography session. But before the company can make good on its promise to deliver, it goes belly-up. Now what?
You might think that the hundreds or even thousands of dollars you've put down has vanished along with the company itself, but if you put the charge on a credit card, you may be in luck, says Sukhi Sahni, a spokeswoman for Capital One. "For a credit card purchase, individuals have protections through Visa, MasterCard, and the card issuers," she says. (The same is true for American Express.) "Even when a merchant goes bankrupt, customers can still receive a credit for their purchase," she says.
But the process of getting your money back may be easier said than done. The first step is for a customer to initiate a merchant dispute. Typically, a temporary credit is immediately issued on the account during the research and dispute process. On your end, you'll need to provide documentation linked to the sale as well as any evidence that indicates that you never received what you paid for. If the details suggest the complaint is legitimate and the merchant didn't deliver, the acquirer -- the financial institution that contracts with merchants to accept a given card -- deducts that amount from the merchant's account.
Who foots the bill?
Of course, if the merchant's gone bankrupt, there may not be any money in its account to deduct. In this case, Visa, MasterCard and American Express require that the acquirer cover the loss. It's not merely a suggestion, says Teri Charest, a spokeswoman for U.S. Bank. "Banks are bound by [these] rules and parameters established by the card networks," she says.
As the blame -- and the balance -- bounce between merchant, acquirer and you, the customer, don't be surprised if something falls through the cracks. Melanie Backs, spokeswoman for American Express, acknowledges that complicated situations like this don't always fit easily into AmEx's extensive charge-back policies. "We have both a merchant dispute policy and a purchase protection policy -- but this situation is a bit of a gray area," she says.
The cardholder should notify their issuer as soon as possible once the merchant has gone out of business.
So what's a frustrated customer to do? In short, says Visa spokeswoman Sarah Pew, be proactive. "The cardholder should notify their issuer as soon as possible once the merchant has gone out of business," she says. And don't be afraid to ask for help, says Charest. "We will work with our customers to ensure they are taking all necessary steps to process a charge-back to the merchant if goods or services were not delivered," she says.
If all else fails ...
It's possible that even the most diligent consumer with a legitimate claim will, for whatever reason, fail to receive their deposit back through the various dispute processes and channels. But you've got one more option if all else fails: to file a proof of claim and get in line with anyone else who is owed by the business, says John Penn, a partner at the law firm of Haynes and Boone in Fort Worth, Texas. According to federal guidelines, in a bankruptcy there's a priority for individual consumer payments up to $2,775 "arising from the deposit, before the commencement of the case, of money in connection with the purchase [of goods or services] that were not delivered or provided."
But that "priority" is pretty flimsy. He compares it to being at the bottom of a tower of champagne glasses: The top level must be fully filled (that is, paid) before moving to all the tiers that follow. Not only do secured credit holders get paid first (they're not even considered part of the tower), but card deposits for a customer come after all wages, benefits and retirement expenses have been paid for all employees -- as well as all professional fees in the bankruptcy case.
So is it even worth filing a claim, given that a bankrupt company probably wouldn't be going bankrupt if it could pay all of those costs in the first place? Penn says it's probably best only for the eternal optimist. "Never say never, but don't go out and spend the money and assume that it's coming," he says.
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