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Consumer groups recently filed a petition with the Federal Trade Commission requesting protection from losing money on gift cards when retailers file for bankruptcy. The issue came to light following retailer bankruptcies, and millions in lost gift card dollars for consumers.

The petition was filed by Consumers Union, the non profit publisher of Consumer Reports, the Consumers Federation of America and the National Consumer Law Center.

"Gift cards shouldn't be the gift that stops giving when retailers go bankrupt," said Michelle Jun, senior attorney for Consumers Union. "Unfortunately, there is no guarantee that consumers will be able to redeem the full value of their gift cards from struggling or bankrupt retailers."

Bankruptcy courts treat unused gift card funds as a debt and determine whether or not the retailer must pay it. It's up to the retailer to petition the court to allow it to continue to accept its gift cards. Consumers may lose the value of their gift card if the retailer doesn't make such a request or if the court denies it.

In these cases, the only remaining option for consumers is the cumbersome task of filing a claim as an unsecured creditor to the bankruptcy proceeding. Consumers with Sharper Image gift cards, for example, were informed that they could no longer use them when the retailer filed for bankruptcy.

At that time, an estimated $20 million remained unused on the retailer's gift cards, and even more on related promotional cards. Sharper Image later petitioned the court to allow it to accept its own gift cards if consumers spent twice the value of the gift card on a single transaction.

Now that the retailer has shut its doors, consumers who want to redeem their gift cards must file as unsecured creditors in the bankruptcy proceeding. Attorneys representing gift card holders recently petitioned the court to certify such consumers as a class, to give them stronger bargaining position in the bankruptcy case.

Although retailers may intend to accept gift cards to maintain customer loyalty and goodwill when under bankruptcy protection, they may not have the funds to cover the value of unredeemed gift cards. After Linens N' Things filed for bankruptcy, it won court approval to continue to operate its gift card program. However, filings in the bankruptcy case made clear that the company did not maintain a cash reserve amount to fund outstanding gift cards.

In the petition to the FTC, the consumer groups urged the agency to require retailers to segregate funds generated from gift card sales in a trust account and to honor a consumer's gift card as long as the doors remain open, unless a bankruptcy court orders otherwise.

Article ID: 795