Gift Cards

Gift Cards - 3/13/08

Jeff: The Sharper Image recently filed for bankruptcy and thousands of gift cards to Sharper image may now be worthless. Last Christmas consumers spent over 26 billion to buy gift cards. If you have a gift card, and the company goes out of business, are you out of luck? Here to discuss the value of a gift card is attorney Michael Solomon.

Jeff: Doesn't the law protect the purchasers of gift cards if the company goes bankrupt?

Mike: Ohio passed a law in 2006 giving holders of gift cards several important protections. Ohio law prohibits companies from imposing fees that reduce your gift card if you don't use it in the first two years, and the law also prohibits the expiration of a gift card for at least two years. However, nothing in Ohio law protects you if the company files for bankruptcy. Then Ohio law gives you no protection.

Jeff: So what happens if you hold a gift card with a company that has filed for bankruptcy.

Mike: Basically, your gift card is an interest free loan to the company. You are just an unsecured creditor. If the company files for bankruptcy and decides to liquidate, then at best will you see only a few cents on the dollar when the company liquidates. You may get a dollar or two for your $100 card. Secured creditors like the banks will be paid before you. Then your gift card is just one of many other debts of the business and everyone receives a share of what is left in the company. After paying off all of the secured creditors, and legal fees there is usually little left.

Some companies like Sharper Image for example try to reorganize under what is called Chapter 11. This means they are going to try to stay in business. To insure the goodwill of its customers, Sharper Image might ask the bankruptcy court to let them honor the gift cards. So don't throw your cards in the trash just yet.

Jeff: Is there any way for consumers to protect themselves?

Mike: If you could show that the gift cards were issued to you when the company was aware that it would be filing bankruptcy, you might be able to claim fraud and have a better chance to receive a higher percentage of any assets that are left in the company. But it may cost you more in legal fees to show this than you could ever get back. Your best bet is to try to avoid problems in the first instance. Don't hold too much money in gift cards so if you get caught in a bankruptcy it wont hurt so much. Also spend the gift cards, don't hold them a long time. Besides the bankruptcy risk, after two years they could expire.

Jeff: Thanks Mike. Lets hope that most people will cash in their cards before they ever face a similar situation.