Tips to get the most from bankrupt retailers' gift cards

A company's collapse doesn't always make its gift cards worthless

If you’re like many Americans, you have some unused gift cards lying around, and you’ll probably get more of the popular plastic this holiday season. Unfortunately, because more retailers of all sizes are filing for bankruptcy, you may never get the chance to redeem them. But even as the economy tanks, there are steps you can take to avoid ending up with a useless gift card.

Gift cards from bankrupt retailers

National Retail Federation officials say gift cards are again the most requested gift this year, and they aver that most retailers here today will be here next year. It’s true that they’re still a big business – business research firm The Tower Group says $60 billion in retailer gift cards will be bought this year – but ’s down $10 billion from 2007, and worry is spreading.

When business goes bad, gift card recipients are often left with nothing. Brian Riley, research director with the Tower Group,estimates cardholders could lose more than $75 million this year with all the closings.

“Retail bankruptcies usually peak in January or February,” Riley said, “so many stores could go kaput after the holidays.”

“Given the economy, it’s more important than ever for consumers to understand who’re they buying from and doing business with.”

Retailers not always allowed to honor cards
While many bankrupt retailers say they intend to honor gift cards, it’s not a sure thing. They may plan to reorganize and come back stronger than ever but then decide the next day to shut their doors and liquidate. A bankruptcy court judge may also deny their petition to honor cards. In short, decisions can turn on a dime.

Take Sharper Image. After filing for Chapter 11 last February, the electronics retailer said it wouldn’t honor gift cards in stores or online. A few weeks later, it got approval from the U.S. Bankruptcy Court to honor them – but only if customers spent twice the gift card’s value on a single transaction. Then in May, Sharper Image announced it was closing all stores and recommended cardholders file a proof-of-claim form with the bankruptcy court. Riley estimates $62 million worth of its gift cards went unused.

How to limit risk when buying gift cards

  • Follow the news: Even if you’re convinced your favorite retailer is solid, pay attention to its business anyway. You don’t have to analyze its quarterly earnings statement, but you may want to follow news about layoffs, store closings and cash-flow problems.
  • Pay with a credit card: You’ll have a better chance of recouping your money if the worst happens.
  • Consider mall cards: Shopping centers offer cards good for use at any of its stores. That reduces the risk if any one store tanks. But you should also keep an eye on the mall owner for business problems. Some mall developers are selling their properties because of faltering financials.
  • Consider bank-sponsored gift cards: Sales of general-purpose, open-loop cards issued by a bank or credit card company such as Visa or Mastercard are on the rise. They can be used nearly anywhere and for anything, even gas and groceries. The downside is that fees, expiration dates and nonuse penalties can reduce the balance.

Another fiasco involves furniture retailer Bombay Company. A bankruptcy judge denied the company’s request to honor cards after it filed in 2007. Court documents last summer show Bombay offered to pay suppliers and unsecured creditors, including gift cardholders, an average of 25 cents on the dollar for nearly $70 million in claims.

Gift cardholders have to get in line
When a company files for bankruptcy, everyone it owes money to lines up for payment. A few states, including California and Minnesota, require companies to accept cards they issued before filing for bankruptcy, but federal law often takes precedence. Bankruptcy court decides who moves to the front, and gift cardholders are usually toward the end. Petitioning the courts to recoup some of the card’s value is one option, but it will be a frustrating experience, says Riley. “Your $50 card will pale in comparison to the $50 million bill Hewlett-Packard has.”

Two of the latest big names to file – Circuit City and clothing retailer Steve & Barry’s – intend to honor gift cards, but while Circuit City plans to stay open, Steve & Barry’s is closing its stores, possibly leading to another issue for gift cardholders: A bankrupt retailer may be liquidating its stores and not refreshing its merchandise, so there may be nothing worth buying. You may not be allowed to use it online either.

Some bankrupt retailrs are still selling cards. “After Linens ’n Things announced liquidation, I bought a $20 gift card just to see if I could go through the claim process, but they never should have sold it to me,” says Riley. “A local CVS drugstore was still selling their cards. It shows you have to be vigilant.”

Needing greater regulation?
While the gift card market is massive, there are few regulations in place. “This industry is just a decade old, and no one expected it to grow so big so quickly, so there hasn’t been time to put laws in place similar to those for credit cards,” says Riley.

In September, some public-interest organizations, including Consumers Union and the National Consumer Law Center, petitioned the Federal Trade Commission to give retail gift cardholders more protection. Gail Hillebrand, senior attorney with Consumers Union, says the biggest change should be requiring retailers to place money from gift card sales in a trust account used to honor them in case of bankruptcy. “Now, cardholders are the biggest losers in a bankruptcy case, so the federal government should step in and regulate.”

Peggy Twohig, the FTC’s associate director for financial practices, says the issue is being “carefully considered” but would require changes to federal bankruptcy laws. “Given the economy, it’s more important than ever for consumers to understand who’re they buying from and doing business with.”

So for now, those who give cards and those we receive them are on their own when dealing with a bankrupt or soon-to-be bankrupt retailer gift card. Here are methods both parties can use to wring as much value from them as possible.

If you’re giving a card:

  • Take it back. Although most don’t have card return policies, it’s worth a shot. Do the same if you used a third-party retailer, such as a supermarket or drugstore. Your chances are better if you kept your receipt and return it quickly.
  • Swap for another card: Those who bought gift cards at Internet sites that let you buy, sell and swap them may be covered by bankruptcy insurance policies and not even realize it. says it will transfer unredeemable balances to gift cards from stable retailers. A $50 Circuit Card recently could be swapped for equal-amount cards from five retailers, including Home Depot and Bloomingdale’s. reimburses for any unused card value. Claims should be submitted within 30 to 60 days of retailer bankruptcy and, of course, they’re only good for cards bought on the sites.

If you’re receiving the card:

  • Use it immediately: Historically, only a third of giftees use cards within 30 days of receiving them. “In this economy, however, use it as soon as you get it, even if the store hasn’t filed,” says Twohig, who admits she has two unused gift cards still sitting at home.
  • Call the retailer: If the company has filed, call the nearest store and ask if it is accepting cards. If you’re too far a drive from a store, or if it’s an online retailer, call the company and ask if cards are redeemable on its website.
  • Sell it online: Putting it on eBay is an option if your card is for a retailer with no stores near you. Because gift card fraud is not uncommon on auction sites, be upfront about the card’s value, expiration date and other restrictions. Also be aware you’ll lose some money in commission fees.
  • Check with competitors: A retailer’s rivals may offer to redeem at least some of the value. When Sharper Image reneged, Brookstone offered a 25 percent discount on any item purchased by an Sharper Image cardholder. When Bennigan’s fell, Texas Roadhouse let cardholders exchange for a free certificate good for any item on the menu.
  • If all else fails, go to court: If you have a high value card or just feel like fighting for justice, you can file as an unsecured creditor. You should file a “proof of claim” document with the specific bankruptcy court the retailer filed in. (That information should be listed on the company’s website, or you can call and ask for it.) Include a photocopy of the card and any information about its value. File before the mandated deadline. Keep an eye on the legal process. If it files for “liquidation” through Chapter 7, there probably won’t be assets to pay off most, if any, gift cards. Some bankruptcy courts consider gift cards to be “consumer deposits” that are entitled to unsecured creditor priority over some other claims, but not all courts follow suit.
  • Protest to the government. “It’s a good idea to contact your state attorney general because that may start some new consumer protection,” says Kwame Kuadey, CEO of and author of “It can especially work with small, local retailers.” He cites a recent success story in Missouri, where more than 300 consumers with worthless gift cards from a bankrupt St. Louis spa filed complaints with the attorney general’s office, which got spa owners to pay $103,000 to redeem the cards. As retailers keep faltering nationwide, more attorney general offices are banding together against bad redemption policies. When Tweeters, an East Coast electronics retailer, filed Chapter 11 on Nov. 5, 2008, it proposed to honor gift cards only through Nov. 15. State officials in Connecticut, Georgia, Illinois and Maryland filed an objection to the short time frame, forcing Tweeter to honor cards until its stores were closed.
Despite gift cards’ current issues, Tower Group analyst Riley intends to give them as holiday presents, but he’ll only use a select few, solid retailers. He’ll also request that recipients use them ASAP.

See related: Brookstone accepts Sharper Image gift cards, Competitors honor Bennigan’s gift cards

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Updated: 07-18-2018