You'd better watch out Gift cards can be lumps of coal

ByABC News
November 18, 2008, 1:48 AM

— -- Peer into any family's closets and you'll find the Gifts of Christmas Past. Scented candles. Reindeer sweaters. A stuffed bass that sings Don't Worry, Be Happy.

Gift cards are designed to reduce closet clutter. They're always the right color, and they're never too large or too small. While the National Retail Federation estimates that gift card sales will drop about 6% this year reflecting a slowdown in overall spending this holiday season nearly two-thirds of consumers plan to buy them, according to a survey by Deloitte. And 55% of consumers say they would like to receive a gift card, according to the NRF.

But the warm feelings generated by a gift card could turn cold in a hurry if the retailer that issued the card goes out of business. Gift card holders have few rights when a retailer files for bankruptcy. And with retail bankruptcies expected to rise next year, that's a real concern.

Some consumers have already been burned. When Sharper Image filed for bankruptcy earlier this year, gift card holders were informed they could no longer use their cards. The company later asked the court to allow it to accept gift cards if holders spent twice the value of the gift card on a single purchase. Consumers Union estimates that unused Sharper Image gift cards totaled $20 million.

Consumers who held gift cards for Bombay Co., which filed for bankruptcy protection last year, didn't fare much better. In August, the retailer won approval from the bankruptcy court to pay off gift card holders 25 cents on the dollar.

Tweeter, a consumer electronics chain that filed for Chapter 11 bankruptcy in early November, originally planned to stop accepting gift cards on Nov. 15. After several state attorney generals intervened, the company agreed to accept gift cards through Dec. 31, or until its stores close.

When a retailer files for bankruptcy-court protection, gift card holders are considered unsecured creditors, says Michelle Jun, attorney for Consumers Union, an advocacy group. It's up to the retailer to ask the bankruptcy court to allow it to continue accepting gift cards. If the retailer doesn't make that request, or the court denies it, gift card holders have to get in line with all the businesses and individuals that have claims against the retailer. "If you have a $50 gift (card), it's pretty burdensome" to file a claim for relief, Jun says.