Toys ‘R’ Us Expected To File For Bankruptcy This Week

Image courtesy of Nicholas DiMaio

UPDATE: The reports were true — Toys ‘R’ Us has indeed filed for Chapter 11 bankruptcy protection, and says it hopes to keep its stores running through this holiday season.

===Original Story===

Do you have a Toys ‘R’ Us or Babies ‘R’ Us gift card sitting around? It might be time to use that up, just in case: The toys and kids’ chain is expected to file for bankruptcy basically any day now.

The rumor mill, via CNBC (warning: auto-play video at that link), says that a bankruptcy filing could come as early as this week, to reassure toy suppliers that the company won’t be buried in debt for the holiday season.

It’s all about Christmas

Last week, Bloomberg News reported that suppliers had cut back on shipments to Toys ‘R’ Us at the most important time of year. The chain is even more dependent than the rest of the retail industry on the holiday season because, for any precocious children reading this article, Santa shops there.

The company didn’t do well during the 2016 holiday season. A repeat of that performance is a scary thought, since the chain normally takes in 40% of its earnings during the last 25% of the year.

Toys ‘R’ Us is owned by two private equity firms and a real estate company, and it has $400 million in debt coming due in 2018. Filing for bankruptcy or finding another way to organize that debt would be a good way to show suppliers that everything is under control, and that they can keep on shipping toys through the holiday season and beyond.

Gift cards: Use ’em up now

The reason why we urge readers to use their gift cards up when a retailer may file for bankruptcy soon is that a Chapter 11 filing often voids the company’s past gift cards. That’s bad when a chain shutters all of its stores and there aren’t any stores left where you can spend the cards, but it’s especially annoying for consumers when the store stays in business, yet you can’t use the card there since a new owner purchased the retailer out of bankruptcy.

The first bankruptcy of RadioShack in 2015 changed how some retailers deal with gift cards after a Chapter 11 bankruptcy. The Attorney General of the company’s home state, Texas, was outraged that a company could reorganize and void millions of dollars’ worth of gift cards. He arranged a settlement where gift card holders would be paid first, before the company’s creditors, with the remaining balance of gift card funds going to the offices of states’ attorneys general.

Since then, there’s been a trend to keep on accepting gift cards. Payless ShoeSource filed for Chapter 11 bankruptcy due to unmanageable debt, just like Toys ‘R’ Us, but still accepts pre-bankruptcy gift cards. While forcing a retailer to pay out millions of dollars in cash refunds to gift card holders is a pro-consumer move, it’s easier for a retailer to just keep accepting its old cards rather than risk being forced into a settlement like RadioShack’s.