On Wall Street, lawmakers are talking about how “toxic debt” threatens banks and lending. Out on Main Street, shoppers better start thinking about “toxic” gift cards from companies that could go bankrupt – they won't be worth the plastic they're printed on.
There's a new realization that holding a gift card from a troubled retailer is like having a bank account without FDIC insurance.
It's not an idle worry.
Shoppers spent an estimated $26.3billion on gift cards at retailers last Christmas season, compared with $24.8 billion in 2006 and $18.5 billion in 2005, according to the National Retail Federation.
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“I am very wary of gift cards this year and do not plan to use any of them at all during the holiday season. I simply do not trust the companies unless they put on a label saying that they are fully returnable at face value,” said Dr. Richard Glassock of Laguna Niguel, Calif.
Already, some big retailers, including Sharper Image and Bombay Co., have filed for bankruptcy protection, leaving gift-card holders with millions of dollars of what the bankruptcy court considers unsecured debt. Both chains have since closed.
Circuit City, the country's No. 2 electronics chain, filed for bankruptcy protection last week and plans to close nearly one-fifth of its stores, including one in Charlotte's University City area. The company's gift cards were not affected by the bankruptcy filing.
But Consumers Union said that when Sharper Image filed for bankruptcy protection this year, it left an estimated $20 million on unused gift cards and maybe as much as $40 million when merchandise certificates and related promotional cards were included. At first, Sharper Image said it would not honor the credits. Later, it successfully petitioned the court to allow it to accept gift cards if consumers spent twice the value of the gift card on a single transaction.
“That wasn't such a good deal, and who knows if anybody used their cards that way,” said Anthony Giorgianni, associate editor of Consumer Reports, which is published by Consumers Union.
In August, home-furnishing retailer Bombay Co., which closed 388 stores, won approval from a U.S. bankruptcy judge to pay off gift-card holders 25 cents on the dollar.
Gift-card holders could lose more than $75 million just from store and restaurant closings in 2008, said Brian Riley, senior analyst at Tower Group, a consulting company.
“The only way that number will change is up,” Riley said.
Consumer groups are worried about how little shoppers are protected when spending all that money. In September, a coalition of organizations asked the Federal Trade Commission to protect shoppers from losing money on gift cards when retailers file for bankruptcy protection.
It said retailers should be required to place money from gift card sales in a trust account that would be used to honor the cards if the merchants continued operations under the protection of the Bankruptcy Court. Consumers Union, Consumers Federation of America, National Consumer Law Center and the advocacy group U.S. PIRG are all behind the proposal.
FTC spokesman Mitchell Katz said the agency had received the petition “and we are determining what our response will be.”
Unless the federal government regulates the industry, shoppers could lose the value of their gift cards when a merchant files for bankruptcy protection. Companies can petition the court to allow it to continue to accept gift cards.
In cases in which a company is reorganized or sold and remains a business, most owners will receive court authority to honor the cards as a way to maintain goodwill with consumers and drive customer traffic, said Marty Zohn, a bankruptcy attorney with Proskauer Rose in Los Angeles. That's what happened with Circuit City, which received court approval to continue its gift-card program.
But in outright liquidations, in which the stores are closed, shoppers will be out of luck in most cases, Zohn said.
State laws have proved ineffective in protecting gift-card holders in bankruptcies, said Giorgianni of Consumer Reports.
That's why Consumers Union is recommending that people avoid giving gift cards this Christmas season.
“If you don't know what gift to buy, just give cash,” he said. “It's something that never expires.”