FTC: Protect Gift Card Holders When Companies Go Bankrupt

Consumers Union (CU) filed a petition with the FTC Thursday to protect consumer gift card holders more when retailers go bankrupt. For as long as the stores remain open, CU wants companies to have to hold gift card funds in a secure trust, unless bankruptcy courts say otherwise. Currently…

…bankruptcy courts treat gift cards as loans to the company, and the onus is on the merchant to petition the court to let it keep accepting them. If the merchant doesn’t, then consumers have to file claims as an unsecured creditor in order to redeem the cards. “Gift cards shouldn’t be the gift that stops giving when retailers go bankrupt,” said Michelle Jun, CU senior attorney. “Unfortunately, there is no guarantee that consumers will be able to redeem the full value of their gift cards from struggling or bankrupt retailers.”

Consumers urge FTC to protect gift card holders [BusinessWeek]
Gift Cards: The gift that can stop giving [Financial Privacy Now Blog] (Photo: paper house)


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  1. zentex says:

    I don’t see this going anywhere. It’ll cost companies too much to do what the CU wants, and we all know business doesn’t do anything that can be done a cheaper way.

    • mike says:

      Gift cards are great for parents or anyone who you know would use cash to pay for other stuff instead of an indulgance.

      This is a good idea, but I agree with zentex that it’s going to cost a lot.

      • shockwaver says:

        @linus: That’s my feeling. If I get a couple hundred dollars (total) from a bunch of people for christmas (because I live in Canada, and my family lives in the US) I pretty much feel obliged to spend it on things I need, such as food (which I can afford anyway, but it’s the feeling). If I get a gift card, I can justify to myself to go and buy some cool thing somewhere – you know, as long as I don’t spend more then the card.

    • BrianDaBrain says:

      @zentex: Agreed. There’s not much chance of this going too far, methinks. I spend gift cards pretty much as soon as I get them.

      @mtaylor924: I do remember this. Wal-Mart used to do it, and so did most other major stores. I miss it.

    • johnva says:

      @zentex: I don’t care if it costs them too much. They should either protect people’s money properly, or cease the practice of issuing gift cards.

  2. snoop-blog says:

    Gift cards,… the stuff last minute x-mas shoppin is made of!

    Nothing says I only did this because It’s a social obligation like a gift card!

    Gift cards,… because you don’t want them to blow it on hookers and beer.

    Gift cards, screwing people out of cash since 1990!

    … I got a million of em.

    • austinchu says:

      @snoop-blog: I agree with you, companies won’t be happy about it. But if they are forced to do it, it’s definitely for the consumers. I feel as if they are a bit too late, half the companies that were going under, are already under. Our company was stuck with thousands of sharper image gift cards. we’re screwed. even filing a claim doesn’t matter

  3. Starfury says:

    Gift cards: Spend when you get them…or regift.

    I like Amazon gift cards myself.

  4. B says:

    If you’re that desperate for gift ideas, just give cash. It might be tacky, but everybody loves cash, and it’s accepted anywhere. Of course, the way the economy is headed, maybe giving Canadian dollars is the way to go.

  5. ohiomensch says:

    There are good uses for gift cards. I have several relatives that are out of state. We had a bridal shower for my daughter, the deal was to give a gift card for some item on her registry. One person just bought the item, which was wonderful, except that it cost $29.00 to ship the $25.00 item to her.

  6. mtaylor924 says:

    When I receive (or buy) a gift card, I don’t consider it to be an “interest-free loan” to the store/company. As far as I am concerned, it means I have already purchased $xx worth of merchandise, I just haven’t picked it out/taken it home yet.

    To put it another way…does anyone remember stores that used to let you put large purchases like furniture on “layaway”? You could make smaller payments in advance, then when you had enough of a balance with the store you could take home the item you wanted. How are gift cards different? Or may they aren’t – can a store just keep your “layaway” balance if it goes bankrupt before you take home your new sofa?

    Can anyone explain how, legally, the bankruptcy courts can consider a gift card to be a “loan” when the store doesn’t pay interest on the gift card balance until it’s used?

    • Marshfield says:

      @mtaylor924: the store doesn’t pay interest on the gift card balance until it’s used?

      I don’t recall ever having the store pay interest on a gift card.

      • mtaylor924 says:

        @Marshfield: Sorry, didn’t explain that clearly…I meant if it’s considered a “loan” – they should have to pay interest from the time you buy the GC until the time you redeem it.

        They don’t…thus it shouldn’t be considered a loan.

    • SkokieGuy says:

      @mtaylor924: I agree with your thinking, but our thinking has nothing to do with bankruptcy laws.

      How’s this? I’ve experienced a consignment store (you let them display and sell your furniture and antiques, when it sells, they keep 40% as a comission, you get 60%) going bankrupt.

      The courts locked the doors, and the contents, which were not owned by the store, were kept and then auctioned off at the bankruptcy sale. So you had people bidding on their own property! One woman was destitute and had recently lost her mother. She gave the store all her mother’s possesions on consignment and lost everything.

    • austinchu says:

      @mtaylor924: It’s a common misconception. When you purchase a gift card, the store technically owes you. You give Gap $25 bucks for a gift card, the money is still yours. It’s a strange and confusing subject. In addition, the store can’t claim the gift card sale as revenue, because it technically hasn’t been spent by the consumer on a product. It’s a loop hole. When gift cards aren’t spent/lost/unclaimed, the state gets to keep the funds. You might want to read this article: [www.philadelphiafed.org]

      • mtaylor924 says:

        @austinchu: Well if that’s the case, that the money is still technically mine, why do 99% of stores refuse to allow people to return/exchange GC’s for cash?

        I understand what you are saying, but the contradiction here indicates that these loopholes definitely need to be closed for consumer protection!

        • austinchu says:

          @mtaylor924: I know! It’s just the rules terms and conditions that the retailers have put in place. It’s not fair and often times, it seems like it’s illegal–to say the least. The reason being: retailers want you to come in and buy products, they don’t want you coming in to exchange it for cash. They know you won’t stay. What’s stopping you from exchanging your best buy gift card for cash, so you can buy your product elsewhere? However, new legislation is in place. In California, if your gift card is under $10, they will give you cash. At least this is happening. Here’s the link: [caselaw.lp.findlaw.com]

  7. lordargent says:

    B : If you’re that desperate for gift ideas, just give cash.

    Or, at least make it one of those visa gift check card things, so that they aren’t locked to a specific store.

    /plus there are fancy ways to give cash. For example, I once gave an old small wooden chest (found at a thrift store for ~$10) with $200 worth of $1 coins and paper cash inside of it (along with some polished stones).

  8. SkokieGuy says:

    Actually when the pending bankruptcy was announced, the store closing date was given (about a week away). My Mom had a few thousand dollars worth of items. We did exactly that, went through the store and (technically illegally) reclaimed our own property.

    She still lost some $$ for items that had already sold but they had not yet paid her, but the loss was drastically limited.

    I was hoping the store would confront us, so I could play tough guy, but they were sympathetic and didn’t stop us.

    • johnva says:

      @SkokieGuy: Nice, good to hear you at least got something. At the bankruptcy sale, would you at least get your 60% cut from the proceeds of the auctioned items? If other creditors get 100% first, then THAT seems horribly unfair.

  9. Ein2015 says:

    I never understood the idea of a “gift card”… seriously.

    Why don’t you give money, or, at least say “hey look, I went to this store, saw some awesome shirt, but didn’t remember your size. Anyway, here’s the money to cover it, go pick it up!”

    *shakes head*

    This really is just another reason to NEVER get a gift card!

    • austinchu says:

      @Ein2015: It’s because it the gift card is the perfect name. It was designed by companies and retailers to get people back into the store and spend more money. The only positive aspect is gifters of gift cards feel as if they are giving a “gift” and receivers feel like they are getting a “gift.” If gift cards was named “store credit card” it wouldn’t have the same impact. Personally, I think it’s weird that human beings invented another form of money. We should start collecting rocks and pay our mortgage with them.

  10. Kevin says:

    When I was a kid, GC were a god send. I HAD to buy something with it, my mom couldn’t make me put it in the bank. Now at 30, I see them as pure evil a way to get kids hooked on notion that plastic is king.

    BTW, a trust account is the best idea for this type of complaint. If a company is smart, they can get interest on the account while protecting consumers. It’s a win-win.

  11. laserjobs says:

    Here is a reason I have to give gift cards instead of cash. My relatives ar religious and they give 10% of the cash the kids receive to the church. I have no idea what to buy these kids since I don’t watch Disney.

    • pecan 3.14159265 says:

      @laserjobs: *shrug* Not seeing the big deal with parents teaching their children how to tithe…but if I were a kid, I’d probably be really, really, annoyed that my money was being given away, so I see your point.

  12. pegr says:

    If you happen to get a GC from a shopping mall or some other organization that covers many different stores, and the GC happens to look something like a check, it is. Deposit it and take the cash instead.

    //former mall rat…

  13. pecan 3.14159265 says:

    We got money as a gift from some family and friends and spent it on rent. Sentimental? Not really. Neccesary? No, because we can afford rent, but it’s the fact that our money can go to things we wanted to buy, but couldn’t bring ourselves to buy with our own hard earned money when we had to pay rent. With others helping us pay rent, we felt a little freer to buy the little things we wanted.

    Gotta love cash.

  14. the problem is, if stores are required to accept gift cards while they are failing, people (ie, me) will rush to the store to buy something while the card is still worth something.
    the store then has the same amount of money on hand (they already had the cash used to buy the giftcard) but no longer have the merchandise
    it could potentially cause a rush on said stores after they declare bankruptcy, in such a way that a store who declared chapter 11 bankruptcy could potentially slip into chapter 9

    • Zimorodok says:

      @Gstein: Seems to me that if customers redeeming all their gift cards en masse is enough to push the company even further off the edge, then the company must have been doing HORRIBLE to be bankrupt even after accepting all those thousands of interest-free loans from those customers.

  15. Hyman Decent says:

    In recent years, at holiday time (or Xmastime, for you Xtians), Uno Chicago Grill has given a $5 voucher for every $25 in gift cards you purchase. I’ve bought gift cards for myself to get the vouchers.

    Earlier this year, they offered this bonus out of season. Then in August, I read that they were on the verge of defaulting on some of their debt. I guess the out-of-season offer was a way to raise cash.

  16. johnnya2 says:

    The run on the use of the cards will actually benefit the company because they can call them sales at that point. Remember a gift card sale is not a sale until it is redeemed. It is a liability on their balance sheet. A run on the use of outstanding cards will actually improve their liability position on a balance sheet. A simple way around this is to put the money in an escrow account and the company can only access it as the cards are redeemed. If a company were to suffer a bankruptcy they could then be considered secured in the escrow account and consumers would be paid back. If the retailer goes under that money would could be forced to be collected within a specific time frame or it becomes money for other creditors.

  17. magnoliasouth says:

    I’ve said all along that gift cards are risky… period. I don’t like gift cards and I never will. I prefer either cash, a check or a card like Visa or Mastercard.

    Now I will buy Walmart or Amazon gift cards/certificates, but they are solid companies for now. Also when I buy those, they’re in small dollar amounts so the recipient usually spends it sooner.